<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1996
REGISTRATION NO. 333-07573
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 3851 91-1247269
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN R. KINGMA
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
GARGOYLES, INC.
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
STEWART M. LANDEFELD CYNTHIA L. POPE MICHAEL J. ERICKSON
L. MICHELLE WILSON 114 W. Magnolia Street LAURA A. BERTIN
Perkins Coie 4th Floor JONATHAN K. WRIGHT
1201 Third Avenue, 40th Floor Bellingham, Washington 98225 Heller, Ehrman, White & McAuliffe
Seattle, Washington 98101-3099 (360) 671-5939 6100 Columbia Center
(206) 583-8888 701 Fifth Avenue
Seattle, Washington 98104
(206) 447-0900
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value...... 3,066,667 shares $15.00 $46,000,005 $15,863
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- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 400,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c).
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
GARGOYLES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEMS OF FORM S-1 LOCATION IN PROSPECTUS
- --------------------------------------------------- ----------------------------------------
<C> <S> <C>
Item 1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover
Pages
Item 3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
Item 4. Use of Proceeds......................... Use of Proceeds
Item 5. Determination of Offering Price......... Outside Front Cover Page; Risk Factors;
Underwriting
Item 6. Dilution................................ Risk Factors; Dilution
Item 7. Selling Security Holders................ Principal and Selling Shareholders
Item 8. Plan of Distribution.................... Outside and Inside Front Cover Pages;
Underwriting
Item 9. Description of Securities to Be
Registered............................ Description of Capital Stock
Item 10. Interests of Named Experts and
Counsel............................... Not Applicable
Item 11. Information With Respect to the
Registrant............................ Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Dividend Policy;
Capitalization; Selected Financial
Data; Pro Forma Financial Information;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal and
Selling Shareholders; Shares Eligible
for Future Sale; Legal Matters;
Experts; Additional Information;
Consolidated Financial Statements
Item 12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 14, 1996
PROSPECTUS
2,666,667 SHARES
GARGOYLES(R)
PERFORMANCE EYEWEAR
COMMON STOCK
------------------
Of the 2,666,667 shares of Common Stock offered hereby (the "Offering"),
1,666,667 shares are being sold by Gargoyles, Inc. (the "Company" or
"Gargoyles") and 1,000,000 shares are being sold by certain shareholders (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock listed on the Nasdaq National Market under the symbol "GOYL."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
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Total(3).................... $ $ $ $
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- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $850,000, of which $800,000 are
payable by the Company and $50,000 are payable by the Selling Shareholders.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 400,000 additional shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively.
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or
about , 1996, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
------------------------
SMITH BARNEY INC. ROBERTSON, STEPHENS & COMPANY
, 1996
<PAGE> 4
[gatefold cover with three pages of photographs depicting Gargoyles
products and athletic endorsements]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should carefully
consider the information set forth under "Risk Factors." Unless otherwise
indicated, the information contained in this Prospectus assumes (i) a 5.86-to-1
split of the Common Stock to be effective prior to the closing of the Offering,
subject to certain conditions (see "Description of Capital Stock"), and (ii)
that the Underwriters' over-allotment option is not exercised. References herein
to Gargoyles and the Company include certain predecessors and subsidiaries. See
"The Company."
THE COMPANY
Gargoyles designs, manufactures and markets a broad line of performance and
outdoor lifestyle-oriented sunglasses. The Company competes in the rapidly
growing premium sunglass market by offering a diverse line of products at
suggested retail prices of $80 to $190. The Company seeks to distinguish
Gargoyles brand products in the marketplace by combining innovative styling with
its patented dual lens toric curve technology, which the Company believes is the
most advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 41% from 1992 through 1995.
For the first six months of 1996, the Company achieved growth in net sales of
93% compared to the same period in the prior year.
The Company was founded to develop a sunglass style that not only would
cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes refraction associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with virtually no change in direction. This dual lens design provides
each eye with its own optical center of focus, permitting a wraparound design
without sacrificing overall optical clarity or introducing distortion. The
Company believes this proprietary technology offers the most advanced and
optically correct sunglass lens design available in wrap sunglasses and provides
a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
3
<PAGE> 6
The Company has leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996 (the
"Hobie Acquisition"), which broadened the Company's technology base to include
polarized sunglasses. Further, in May 1996, the Company, together with the
former president of Revo, Inc. ("Revo"), entered into a worldwide license
agreement with The Timberland Company ("Timberland") to design, manufacture and
market sunglasses under the Timberland brand name. The Company believes the
worldwide appeal of the Timberland brand name will assist the Company in further
penetrating the outdoor-lifestyle market segment. Management believes that the
addition of these brands to the Company's portfolio of products will provide
incremental synergies in sales, marketing, distribution, manufacturing and
general and administrative expenses.
Growth Strategies
The Company's objective is to be one of the premier designers,
manufacturers and marketers of performance and outdoor lifestyle-oriented
premium sunglasses and protective eyewear. Management believes that its
strategies have positioned the Company to achieve continued growth in revenues
and earnings. Key elements of the Company's growth strategies include the
following:
- - Capitalize on growth in premium sunglass market. The Company will continue to
focus on increasing its penetration within the premium sunglass segment, which
has grown approximately 82% from 1989 to 1995. Management believes that this
segment will continue to experience rapid growth. The Company also expects to
benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut
International, Inc. ("Sunglass Hut"). The Company believes that as large
sunglass specialty retailers continue to grow, they will increasingly require
well-capitalized vendors which are able to provide adequate product supply on
a reliable basis.
- - Develop and introduce new products. The Company is committed to capitalizing
on its existing market position and proprietary technology by developing new
products and product line extensions that incorporate superior performance and
unique styling. To support its new product initiatives, the Company maintains
an active research and development effort, which has resulted in the
introduction of eight product lines since 1993, including the Paladin, Octane
and Vortex models in 1996. In 1997, the Company anticipates introducing a
number of new products, including its lifestyle-oriented Timberland brand
product line and several new Hobie brand polarized sunglass models.
- - Expand customer base. The Company is focused on expanding its customer base
both domestically and internationally. The strategies of adding a direct sales
force dedicated to selling the Company's products and adding manufacturers'
representatives and distributors to supplement service to the sporting goods
and optical store markets have resulted in significant growth in the number of
its accounts. Since the addition of a direct sales force in 1994, the Company
has added over 1,000 new accounts, and believes there are still significant
opportunities to expand its customer base.
- - Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary
competitors. The Company's international growth plans are based on developing
international distribution networks and investing in overseas operations,
where appropriate.
- - Selectively pursue acquisition and licensing opportunities. The Company seeks
to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The
focus of the Company's acquisition and licensing efforts is to (i) augment the
Company's product lines, (ii) enhance the Company's distribution capabilities,
(iii) leverage the Company's operating infrastructure, and (iv) access new
technology. In particular, the Company's acquisition and integration of Hobie
and its license agreement with Timberland provide new brand names and a
broader customer base, and create distribution and operating synergies.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby by:
The Company................................ 1,666,667 shares
The Selling Shareholders................... 1,000,000 shares
Common Stock to Be Outstanding After the
Offering................................... 7,542,304 shares(1)
Use of Proceeds.............................. To repay outstanding indebtedness; to fund
start-up costs for the Timberland product
line; and for working capital and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... "GOYL"
</TABLE>
- ---------------
(1) Excludes, as of July 31, 1996, 879,000 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 490,025 shares were outstanding with a weighted average exercise
price of $3.46 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
The Company was incorporated in 1983. The Company's headquarters are
located at 5866 South 194th Street, Kent, Washington 98032, and its telephone
number is (206) 872-6100.
Gargoyles is a federally registered trademark of the Company. The Company
has applied for federal registration of the marks Legends, Helios, Paladin,
Vortex, Octane and the G design featured on the cover of this Prospectus. The
Company has common-law trademark rights in the marks Classic, 85s, Legends II
and Griffey Wrap. Timberland and the tree logo are registered trademarks of The
Timberland Company. All other trademarks or registered trademarks appearing in
this Prospectus are trademarks or registered trademarks of the respective
companies that utilize them.
This Prospectus contains certain forward-looking statements which involve
known and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others, those discussed in "Risk Factors" and
elsewhere in this Prospectus.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, JUNE 30,
---------------------------------- DECEMBER 31, -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $6,371 $6,317 $8,242 $11,083 $ 17,896 $ 9,124 $17,627
Gross profit.............................. 3,848 3,834 4,999 6,818 10,879 5,650 10,241
Total operating expenses(1)............... 3,119 3,360 4,314 6,333 10,549 4,847 11,995
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations(2).......... 729 474 685 485 810 1,093 (1,460)
Interest expense, net..................... (60) (35) (55) (176) (1,043) (391) (1,161)
Other income (charges)(3)................. 5 87 2 -- (2,164) (569) --
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes......... 674 526 632 309 (2,397) 133 (2,621)
Income tax provision (benefit)............ 87 107 40 10 (100) 5 --
------ ------ ------ ------- ------- ------ ------
Net income (loss)......................... $ 587 $ 419 $ 592 $ 299 $ (2,297) $ 128 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(4)............ $ 424 $ 380 $ 415 $ 179 $ (2,343) $ 82 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per
share(5)................................ $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $ 0.01 $ (0.43)
Shares used in computing pro forma net
income (loss) per share(5).............. 6,138 6,138 6,138 6,138 6,138 6,138 6,142
SUPPLEMENTAL DATA:
Pro forma net sales(6).................... $ 21,940 $11,446 $17,938
Adjusted pro forma net income(7).......... 616 1,981
Adjusted pro forma net income per
share(8)................................ $ 0.08 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(9)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $(5,012) $ 11,310
Total assets................................................................. 21,818 24,191
Short-term debt.............................................................. 12,536 --
Long-term debt, including current maturities................................. 7,241 --
Shareholders' equity (deficit)............................................... (6,160) 15,990
</TABLE>
- ---------------
(1) Includes stock compensation expense of $250,000, $155,000 and $3.5 million
for the year ended December 31, 1995 and the six months ended June 30, 1995
and 1996, respectively.
(2) Includes license income of $480,000, $290,000 and $294,000 for the year
ended December 31, 1995 and the six months ended June 30, 1995 and 1996,
respectively.
(3) Includes nonrecurring charges for recapitalization expenses of $574,000 for
the year ended December 31, 1995 and the six months ended June 30, 1995 and
provision for loss on affiliate of $1.6 million for the year ended December
31, 1995.
(4) Antone Manufacturing, Inc., an affiliated company, had previously been taxed
as an S corporation. The pro forma net income amounts for all periods prior
to 1996 reflect adjustments for income taxes as if Antone Manufacturing,
Inc. had been taxed as a C corporation rather than an S corporation.
(5) See Note 1 to the Company's Consolidated Financial Statements for an
explanation of the number of shares used in computing pro forma net income
(loss) per share.
(6) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(7) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges of $2.4 million for 1995 and $3.5 million for 1996 (see footnote 4
to the table in "Selected Financial Data").
(8) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
(9) Adjusted to reflect the application of the estimated net proceeds from the
Offering.
6
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the risks associated with investing in the Common Stock, including the
principal risk factors set forth below, as well as other information set forth
in this Prospectus, in evaluating an investment in the Common Stock.
POTENTIAL INABILITY TO SUSTAIN AND MANAGE GROWTH
The Company has experienced significant growth in revenues in recent
periods. The continued growth of the Company's revenues and its ability to
generate profits will depend on, among other factors, the continued growth of
the premium sunglass market, the Company's ability to develop and introduce new
products, and the Company's efforts to broaden and increase sales through its
domestic and international sales and distribution channels.
If the Company continues to experience significant growth, its future
success will also depend on its ability to manage growth as it expands its
production and marketing capacities, which will place a significant strain on
the Company's employees and operations. To manage growth effectively, the
Company will be required to continue to implement changes in certain aspects of
its business, expand its operations and develop, train, manage and assimilate an
increasing number of management-level and other employees. The Company depends
on its management information systems to process orders, manage inventories and
receivables, track product through its expanding manufacturing operations and
otherwise maintain cost-efficient operations. As the Company grows, it will be
required to augment its management information systems from time to time, as a
result of which there can be no assurance that the Company will not experience
systems failures or interruptions. In addition, because the Company's existing
facilities will not be sufficient to support its growth plans, the Company
intends to relocate or expand its existing facilities in 1997, which could cause
delays or interruptions in the Company's operations. If management is unable to
manage growth effectively, the Company's business, prospects, financial
condition and operating results could be materially adversely affected.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The sustainability of the Company's growth will depend, in part, on its
continued ability to develop and introduce innovative products. Innovative
designs are often not successful, and successful product designs can be
displaced by other product designs introduced by competitors that shift market
preferences in their favor. The Company is introducing more lifestyle-oriented
sunglasses, which may have relatively short life cycles, thereby requiring the
Company to introduce new products more frequently. In addition, competitors may
follow the Company's introduction of successful products with similar product
offerings. The eyewear industry is subject to changing consumer preferences, and
the Company's sunglasses are likely to be susceptible to fashion trends. If the
Company misjudges the market for a particular product, the Company's sales may
be adversely affected and it may be faced with excess inventories and
underutilized manufacturing capacity. As a result of these and other factors,
there can be no assurance that the Company will successfully maintain or
increase its market share.
HIGHLY COMPETITIVE MARKET
The premium segment of the nonprescription sunglass market is highly
competitive. The Company competes with a number of established companies,
including Bausch & Lomb Incorporated ("Bausch & Lomb"), the marketer of the Ray
Ban, Killer Loop, Arnette and Revo brands, and Oakley, Inc. ("Oakley"), which
together control approximately 50% of the premium market segment, and with
several companies having smaller but significant market shares. Several of these
companies have substantially greater resources and better name recognition than
the Company and sell their products through broader and more diverse
distribution channels. The Company could also face competition from new
competitors, including established branded consumer products companies, such as
Nike, Inc., that also have greater financial and other resources than the
Company. In addition, as the Company expands internationally, it will face
substantial competition from companies that have already established their
products in international markets and consequently have significantly more
experience in those markets than the Company. The major competitive factors in
the premium sunglass market include fashion trends, brand recognition, method of
distribution and the number
7
<PAGE> 10
and range of products offered. In addition, to retain and increase its market
share, the Company must continue to be competitive in the areas of quality and
performance, technology, intellectual property protection and customer service.
See "Business -- Competition."
POTENTIAL INABILITY TO SUCCESSFULLY INTEGRATE ACQUISITIONS AND LICENSED PRODUCTS
The integration and consolidation of the Hobie sunglass line, the
development of products under the Timberland brand and future acquisitions and
licensing arrangements will require substantial management, financial and other
resources and may pose risks with respect to the Company's business, prospects,
financial condition and operating results. There can be no assurance that the
Company's resources will be sufficient to accomplish the integration of the
Hobie and Timberland products and brands, or that the Company will not
experience difficulties with customers, personnel or others. In addition,
although the Company believes that its acquisitions and licensing arrangements
will enhance its competitive position and business prospects, there can be no
assurance that such benefits will be realized or that the combination of the
Company with other companies will be successful. The success of the Hobie
Acquisition will depend in part on the Company's ability to integrate the Hobie
manufacturing and inventory control systems with those used for the Company's
other products. The success of the Timberland license arrangement, the Company's
first effort to develop a new product line using a third-party brand, will
depend in part on the continuing strength of the Timberland brand and the
Company's ability to expand recognition and acceptance of the Timberland brand
into the sunglass market, and the Company's ability to expand its products from
a sports-oriented product line to include a lifestyle-oriented line for
Timberland. There can be no assurance that the Company's efforts will result in
significant sales or net income, if any. The Company may, if opportunities
arise, acquire or license other product lines or businesses.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend to a significant extent on the efforts of
its senior management, particularly Douglas B. Hauff and G. Travis Worth. In
addition, the success of the Timberland license arrangement will depend in part
on the efforts of Douglas W. Lauer, who was hired to design and manage the
Timberland brand. Although the Company has entered into employment agreements
with Messrs. Hauff, Worth and Lauer, there can be no assurance that such
individuals will remain with the Company. The Company's operations could be
adversely affected if, for any reason, such key personnel do not continue to be
active in the Company's management. See "Management -- Employment and
Change-in-Control Agreements." In addition, if Mr. Lauer ceases to provide
active and full-time management services to the kindling company ("Kindling"),
the Company's majority-owned subsidiary formed to develop products under the
Timberland brand name, Timberland has the right to terminate the license
agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company History."
DEPENDENCE ON SUNGLASS HUT
Sales to Sunglass Hut, a sunglass specialty retail chain (including sales
to Sunsations, which was acquired by Sunglass Hut in July 1995), accounted for
approximately 32% and 37% of the Company's net sales for the year ended December
31, 1995 and the six months ended June 30, 1996, respectively. Historically,
Sunglass Hut has contributed significantly to the Company's overall growth. The
Company does not have a purchase agreement with Sunglass Hut and a substantial
decline in purchases of the Company's products by Sunglass Hut could have a
material adverse effect on the Company's business, prospects, financial
condition and operating results. In addition, the Company's ability to maintain
historical levels of gross profit will depend in part on its ability to continue
to sell sunglasses to Sunglass Hut at or near historical price levels.
RELIANCE ON LIMITED SOURCES OF SUPPLIES
The Company relies on a single source of supply for several of its
components, including several of its frames, although the Company is attempting
to establish multiple sources for more of its components. The effect on the
Company of the loss of any of such sources or of a disruption in their business
will depend primarily on the length of time necessary to find a suitable
alternative source. The loss of a source for a particular frame or any
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary shortages
in materials and could have a
8
<PAGE> 11
material adverse effect on the Company's business, prospects, financial
condition and operating results. There can be no assurance that precautions
taken by the Company will be adequate or that alternative sources of supply can
be located or developed in a timely manner.
The Company's Classic lens, which is used in manufacturing most of the
other Gargoyles brand products, can be produced only from the Company's molds,
which are operated by the Company's suppliers. If a mold were to become damaged
or unavailable for an extended period, the Company could experience a shortage
of its Classic lens, which could adversely affect the Company's operating
results. Moreover, the Company currently depends on a complex array of multiple
vendors in geographically diverse areas to perform its lens molding,
hard-coating and mirroring processes. The Company generally places orders for
lens molding, hard-coating and mirroring three to nine months prior to
forecasted product sales. The loss of or a delay by any one of its vendors could
interrupt the Company's supply of lenses and could adversely affect the
Company's business, prospects, financial condition and operating results.
Polycarbonate, the material from which the Company's lenses are
constructed, is presently in limited supply in world markets and requires a long
lead time for orders by the Company's lens suppliers. If such shortage continues
beyond current expectations, or if the Company and its lens suppliers are unable
to accurately predict and order sufficient polycarbonate to support the
Company's needs, the Company's lens suppliers' ability to deliver sufficient
quantities of lenses to the Company could be adversely affected or the price of
such lenses to the Company could increase. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH VERTICAL INTEGRATION STRATEGY
The Company, which currently assembles products manufactured primarily by a
network of outside suppliers, intends to vertically integrate and expand its
internal manufacturing capacity to centralize many of these processes. See
"Business -- Manufacturing." There can be no assurance that the Company's
efforts will be successful or will not entail some interruption in supply with
respect to certain products, which could have a material adverse effect on the
Company's business, prospects, financial condition and operating results.
Moreover, the Company's use of chemicals and other materials as it brings
certain manufacturing processes in-house will create some risk of environmental
liability and could lead to environmental compliance and cleanup costs by the
Company of a nature that the Company has not historically experienced.
RISKS ASSOCIATED WITH PROPRIETARY RIGHTS
The Company relies, in part, on patent, trade secret, unfair competition,
trade dress, trademark and copyright laws to protect its rights to certain
aspects of its products and to protect its competitive position and its rights
to certain aspects of its products. There can be no assurance that any pending
trademark or patent application will result in the issuance of a registered
trademark or patent, that any trademark or patent granted will be effective in
discouraging competition or be held valid if subsequently challenged or that
others will not assert rights in, and ownership of, the patents and other
proprietary rights of the Company. In addition, there can be no assurance that
the actions taken by the Company to protect its proprietary rights will be
adequate to prevent imitation of its products, that the Company's proprietary
information will not become known to competitors, that the Company can
meaningfully protect its rights to unpatented proprietary information or that
others will not independently develop substantially equivalent or better
products that do not infringe on the Company's intellectual property rights. The
Company has in the past been, and is currently, involved in litigation
concerning its proprietary rights. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. See "Business -- Intellectual Property."
Consistent with the Company's strategy of vigorously defending its
intellectual property rights, the Company devotes substantial resources to the
enforcement of patents issued and trademarks granted to the Company, to the
protection of trade secrets, trade dress or other intellectual property rights
owned by the Company and to the determination of the scope or validity of the
proprietary rights of others that might be asserted against the Company. A
substantial increase in the level of potentially infringing activities by others
could require the Company to increase significantly the resources devoted to
such efforts. In addition, an adverse determination in litigation could subject
the Company to the loss of its rights to a particular patent, trademark,
copyright or trade secret, could require the Company to grant licenses to third
parties, could
9
<PAGE> 12
prevent the Company from manufacturing, selling or using certain aspects of its
products or could subject the Company to substantial liability, any of which
could have a material adverse effect on the Company's business, prospects,
financial condition and operating results.
RISKS RELATING TO INTERNATIONAL SUPPLIERS AND SALES
The Company imports many of its component parts and finished sunglasses
from international suppliers and, therefore, its prices for and supply of those
components or finished products may be adversely affected by changing economic
conditions in foreign countries and fluctuations in currency exchange rates. In
addition, the Company expects to increase its international sales, although
there can be no assurance that the Company will be able to do so. The Company's
international sales are subject to risks associated with economic conditions in
foreign countries, fluctuations in currency exchange rates, tariff regulations,
"local content" laws, political instability and trade restrictions. In addition,
there can be no assurance that the Company's brands and products will be as
popular internationally as they are in the United States, or that the Company
will be successful in preventing competitors from producing products using the
same or substantially similar technology for sale outside the United States.
FLUCTUATION OF QUARTERLY RESULTS; SEASONALITY OF BUSINESS
The Company's business is affected by economic factors and seasonal
consumer buying patterns. The Company's quarterly results of operations have
fluctuated in the past and may continue to fluctuate as a result of a number of
factors, including seasonal cycles, the timing of new product introductions, the
timing of orders by the Company's customers, the mix of product sales and the
effects of weather conditions on consumer purchases. Historically, the Company's
net sales, in the aggregate, generally have been higher in the period from March
to September. In 1994 and 1995, approximately 59% and 61%, respectively, of the
Company's net sales occurred during its second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
UNPREDICTABILITY OF DISCRETIONARY CONSUMER SPENDING
The success of the Company's business depends to a significant extent on a
number of factors relating to discretionary consumer spending, including general
economic conditions affecting disposable consumer income, such as employment,
business conditions, interest rates and taxation. Any significant decline in
such general economic conditions or uncertainties regarding future economic
prospects that adversely affect discretionary consumer spending generally, or
purchases of discretionary optical products specifically, could have a material
adverse effect on the Company's business, prospects, financial condition and
operating results.
POTENTIAL PRODUCT LIABILITY
Although the Company has not been subject to a significant product
liability claim to date, it may from time to time be subject to such lawsuits,
which generally seek damages for personal injuries allegedly sustained as a
result of defects in the Company's products. In addition, the Company could be
named in the future as a defendant in cases involving products produced by
Conquest Sports, Inc. (formerly Pro-Tec, Inc., "Conquest"), which has been
subject to numerous claims and lawsuits from time to time. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Company History" and "Certain Transactions." The Company maintains
product liability, general liability and excess liability insurance coverage,
including insurance coverage for products produced by Conquest, although there
can be no assurance that the Company's insurance will fully cover the damages
and costs associated with any particular claim.
RISK ASSOCIATED WITH SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock and the Company's ability to raise capital in the future. Of the
7,542,304 shares to be outstanding following the Offering, the 2,666,667 shares
offered hereby will be freely tradable and the remaining 4,875,637 shares will
be "restricted securities" under Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"). Of such restricted securities,
approximately 1,750,000 shares will be eligible for sale beginning 180 days
after the date of this
10
<PAGE> 13
Prospectus upon the expiration of lock-up agreements with the Representatives of
the Underwriters and subject to the provisions of Rule 144, and up to an
additional 600,000 restricted shares may become eligible for sale in March 1997
upon the occurrence of certain events. The Company intends to file a
registration statement on Form S-8 following the date of this Prospectus to
register the shares of Common Stock reserved for issuance upon the exercise of
outstanding stock options. As of September 1, 1996, options to purchase
approximately 107,000 shares will be vested, of which approximately 43,500 such
shares will be subject to the 180-day lock-up period described above. See
"Shares Eligible for Future Sale."
CONTROL BY MAJOR SHAREHOLDERS AND DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers, 5% shareholders and their
affiliates will, in the aggregate, beneficially own approximately 60% of the
outstanding shares of Common Stock after the Offering (approximately 55% if the
Underwriters' over-allotment option is exercised in full). As a result, the
Company's directors, executive officers, 5% shareholders and their affiliates,
acting together, would be able to significantly influence or control many
matters requiring approval by the shareholders of the Company, including the
election of directors. See "Management" and "Principal and Selling
Shareholders."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price for the Common Stock offered
hereby will be determined by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the Offering. The
market price for shares of Common Stock may be volatile and may fluctuate based
on a number of factors, including, without limitation, business performance,
news announcements or changes in general market conditions. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION; ACCUMULATED DEFICIT
The assumed initial public offering price is substantially higher than the
book value per share of Common Stock. Investors purchasing shares of Common
Stock in the Offering will therefore incur immediate dilution of $13.25 per
share. See "Dilution." Primarily as a result of the Recapitalization and other
nonoperating charges in 1995, as of December 31, 1995, the Company had an
accumulated deficit of $1,946,184 and a shareholders' deficit of $7,203,614.
ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority, without shareholder
approval, to issue up to 10,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions of such shares without any
further vote or action by the Company's shareholders. This authority, together
with certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles"), may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company, even if shareholders purchasing
shares in the Offering may consider such a change in control to be in their best
interests. In addition, Washington law contains certain provisions that may have
the effect of delaying, deterring or preventing a hostile takeover of the
Company. See "Description of Capital Stock."
ABSENCE OF DIVIDENDS
Except for distributions made prior to March 22, 1995 by Antone
Manufacturing, Inc., which was taxed as an S corporation, the Company has not
declared or paid any cash dividends on the Common Stock. In addition, the
Company does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
11
<PAGE> 14
THE COMPANY
References to Gargoyles and the Company in this Prospectus include the
Company and its subsidiaries. The Company succeeded to the sunglass business of
Conquest, an affiliated company that transferred its sunglass business to the
Company upon the Company's formation in 1983, and references to Gargoyles and
the Company herein include the sunglass business of Conquest prior to 1983.
Antone Manufacturing, Inc. ("Antone"), an affiliated S corporation that provided
assembly operations for Gargoyles, was merged into the Company in March 1995,
and references to Gargoyles and the Company herein include the combined
operations of the Company and Antone, unless the context requires otherwise. In
February 1996, the Company acquired H.S.I., a California corporation d/b/a Hobie
Sunglasses ("Hobie"). In May 1996, the Company acquired a 70% interest in
Kindling to develop products under the Timberland brand name.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering, assuming
an initial public offering price of $15.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses, are
estimated to be approximately $22.4 million (approximately $24.6 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds as follows: (i) to repay approximately $20 million of
indebtedness anticipated to be outstanding at the close of the Offering; (ii) to
fund start-up costs for the Timberland product line; and (iii) for working
capital and other general corporate purposes (including paying a bonus to an
executive officer as required by an employment agreement, paying obligations
with respect to the discontinued business of Conquest, increasing manufacturing
capacity and expanding international operations). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for information regarding interest rates, maturities and use
of proceeds of indebtedness, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Company History" for information
concerning Timberland and payment of obligations of the discontinued business of
Conquest and "Management -- Employment and Change-in-Control Agreements" and
"Certain Transactions" for information regarding the bonus to the executive
officer. Pending such uses, the net proceeds will be invested in short-term,
interest-bearing investment grade securities. The Company will not receive any
proceeds from shares of Common Stock sold by the Selling Shareholders.
The Company may, when the opportunity arises, use an unspecified portion of
the net proceeds to acquire other businesses having product lines that are
compatible with the Company's business. In addition, any such acquisitions may
be financed with additional indebtedness and may involve the issuance of
significant amounts of the Company's capital stock. Such issuances of additional
capital stock could result in substantial dilution of ownership interests in the
Company. The Company is not involved in any ongoing negotiations related to any
acquisition at the present time, and there can be no assurance that any
acquisition will be made.
DIVIDEND POLICY
Except for distributions made prior to March 22, 1995 by Antone, which was
taxed as an S corporation, the Company has not declared or paid any cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company expects to retain any future earnings to finance the
operation and expansion of its business. Future dividend payments will depend on
the results of operations, financial condition, capital expenditure plans and
other obligations of the Company and will be at the sole discretion of the
Company's Board of Directors. Under the Company's bank credit agreement, the
Company is prohibited from paying cash dividends without the bank's prior
written consent. The Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the Company's short-term indebtedness and
capitalization as of June 30, 1996, and as adjusted to give effect to the
Offering (after deducting underwriting discounts and commissions and estimated
offering expenses) and application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Short-term notes payable............................................ $ 12,536 $ --
Current maturities of long-term debt................................ 1,413 --
-------- -----------
Total short-term debt............................................ $ 13,949 $ --
======== =========
Long-term debt, less current maturities............................... $ 5,828 $ --
-------- -----------
Shareholders' equity (deficit):
Preferred Stock, no par value; 10,000,000 shares authorized; no --
shares outstanding actual or as adjusted......................... --
Common Stock, no par value; 40,000,000 shares authorized; 5,875,637 9,303
shares issued and outstanding actual; 7,542,304 shares issued and
outstanding as adjusted(1)....................................... 31,753
Repurchased shares.................................................. (10,896) (10,896)
Retained earnings (deficit)(2)...................................... (4,567) (4,990)
-------- -----------
Total shareholders' equity (deficit)............................. (6,160) 15,867
-------- -----------
Total capitalization........................................... $ (332) $ 15,867
======== =========
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding with a weighted average exercise
price of $3.42 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
(2) Reflects a nonrecurring $300,000 bonus to an executive officer, in
connection with an employment agreement, to be paid upon the closing of the
Offering, which will be expensed concurrently with the closing of the
Offering and a $123,000 charge for unamortized loan fees associated with
debt to be retired with a portion of the net proceeds of the Offering.
13
<PAGE> 16
DILUTION
As of June 30, 1996, the Company's net tangible book value was
approximately ($9.3) million, or ($1.58) per share of Common Stock. Net tangible
book value per share represents the Company's total assets less intangible
assets and total liabilities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible book
value after June 30, 1996, other than to give effect to the Offering at an
assumed initial public offering price of $15.00 per share and the receipt by the
Company of the estimated net proceeds therefrom, the pro forma net tangible book
value of the Company as of June 30, 1996 would have been approximately $13.2
million, or $1.75 per share. This represents an immediate increase in net
tangible book value of $3.33 per share to existing shareholders and an immediate
dilution of $13.25 per share to purchasers of shares of Common Stock in the
Offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Net tangible book value per share as of June 30, 1996............ $(1.58)
Increase per share attributable to new investors................. 3.33
------
Pro forma net tangible book value per share after the Offering..... 1.75
------
Dilution per share to new investors................................ $13.25
======
</TABLE>
The following table summarizes as of June 30, 1996, after giving effect to
the Offering, the differences between existing shareholders and purchasers of
shares of Common Stock in the Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1)(2) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 5,875,637 77.9% $ 5,924,110 19.2% $ 1.01
New investors....................... 1,666,667 22.1 25,000,000 80.8 $ 15.00
--------- ----- ----------- -----
Total............................. 7,542,304 100.0% $30,924,110 100.0%
========= ===== =========== =====
</TABLE>
- ------------------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding, and 41,020 shares of Common Stock
reserved for issuance pursuant to an outstanding warrant. See "Management --
Benefit Plan," "Description of Capital Stock" and "Certain Transactions."
(2) The above table is based on ownership as of June 30, 1996. Sales by the
Selling Shareholders in the Offering will reduce the number of shares held
by existing shareholders to 4,875,637 shares, or 64.6% (60.2% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 2,666,667 shares, or
35.4% (39.8% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Shareholders."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1994 and December
31, 1995 and for the years ended November 30, 1993 and 1994 and December 31,
1995 are derived from the consolidated financial statements of Gargoyles, Inc.,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus. The selected financial data as of
November 30, 1991, 1992 and 1993 and June 30, 1996, and for the years ended
November 30, 1991 and 1992 and for the six months ended June 30, 1995 and 1996
are derived from unaudited consolidated financial statements. In the Company's
opinion, the unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. This data should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included in this Prospectus. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's consolidated financial statements and the related notes thereto, which
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------- SIX MONTHS ENDED
NOVEMBER 30, JUNE 30,
---------------------------------- DECEMBER 31, -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $6,371 $6,317 $8,242 $11,083 $ 17,896 $ 9,124 $17,627
Cost of sales..................................... 2,523 2,483 3,243 4,265 7,017 3,474 7,386
------ ------ ------ ------- ------- ------ ------
Gross profit...................................... 3,848 3,834 4,999 6,818 10,879 5,650 10,241
License income.................................... -- -- -- -- 480 290 294
Operating expenses:
Sales and marketing............................. 1,485 1,583 2,210 3,041 5,934 2,801 4,985
General and administrative...................... 1,238 1,256 1,453 2,558 3,030 1,335 2,078
Shipping and warehousing........................ 293 310 436 607 1,030 428 1,071
Research and development........................ 103 211 215 127 305 128 333
Stock compensation.............................. -- -- -- -- 250 155 3,528
------ ------ ------ ------- ------- ------ ------
Total operating expenses...................... 3,119 3,360 4,314 6,333 10,549 4,847 11,995
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations..................... 729 474 685 485 810 1,093 (1,460)
Other income (expense):
Interest expense, net........................... (60) (35) (55) (176) (1,043) (391) (1,161)
Recapitalization expenses....................... -- -- -- -- (574) (574) --
Provision for loss on affiliate................. -- -- -- -- (1,597) -- --
Other........................................... 5 87 2 -- 7 5 --
------ ------ ------ ------- ------- ------ ------
Total other income (expense).................. (55) 52 (53) (176) (3,207) (960) (1,161)
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes................. 674 526 632 309 (2,397) 133 (2,621)
Income tax provision (benefit).................... 87 107 40 10 (100) 5 --
------ ------ ------ ------- ------- ------ ------
Net income (loss)................................. $ 587 $ 419 $ 592 $ 299 $ (2,297) $ 128 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(1).................... $ 424 $ 380 $ 415 $ 179 $ (2,343) $ 82 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per share(2).......... $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $ 0.01 $ (0.43)
Shares used in computing pro forma net income
(loss) per share(2)............................. 6,138 6,138 6,138 6,138 6,138 6,138 6,142
SUPPLEMENTAL DATA (UNAUDITED):
Pro forma net sales(3)............................ $ 21,940 $11,446 $17,938
Adjusted pro forma net income(4).................. 616 1,981
Adjusted pro forma net income per share(5)........ $ 0.08 $ 0.25
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------- DECEMBER 31, JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $1,314 $1,053 $1,042 $ (146) $ (2,692) $(5,012)
Total assets.......................................... 2,772 2,422 3,776 6,673 11,266 21,818
Short-term debt....................................... 600 147 811 2,068 5,413 12,536
Long-term debt, including current maturities.......... 303 159 251 489 7,367 7,241
Shareholders' equity (deficit)........................ 1,221 1,097 1,101 776 (7,204) (6,160)
</TABLE>
- ---------------
(1) Antone, an affiliated company, had previously been taxed as an S
corporation. The pro forma net income amounts for all periods prior to 1996
reflect adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(2) See Note 1 to the Company's Consolidated Financial Statements for an
explanation of the number of shares used in computing pro forma net income
(loss) per share.
(3) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(4) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma net income (loss) as adjusted........................................ $ (1,397) $ (1,547)
-------- --------
Add back:
Recapitalization expenses.................................................... 574 --
Provision for loss on affiliate.............................................. 1,597 --
Stock compensation........................................................... 250 3,528
-------- --------
Total adjustments........................................................ 2,421 3,528
Tax effect of adjustments...................................................... 408 --
-------- --------
Net adjustments.......................................................... 2,013 3,528
-------- --------
Adjusted pro forma net income.................................................. $ 616 $ 1,981
======== ========
</TABLE>
(5) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
16
<PAGE> 19
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 and the six months ended June 30, 1996 are unaudited and
were prepared as if the Hobie Acquisition, which was consummated in February
1996 for $3.4 million, was effective as of January 1, 1995 and January 1, 1996,
respectively. The Pro Forma Consolidated Statements of Operations do not purport
to represent what the Company's results of operations would actually have been
if the Hobie Acquisition had in fact occurred on such dates or to project the
Company's results of operations for any future period. The Pro Forma
Consolidated Statements of Operations are based on the historical financial
statements of the Company and Hobie and give effect to the Hobie Acquisition
under the purchase method of accounting. The Pro Forma Consolidated Statements
of Operations as adjusted for the year ended December 31, 1995 and for the six
months ended June 30, 1996 reflect the application of the estimated net proceeds
from the Offering as if it had occurred on January 1, 1995 and January 1, 1996,
respectively. The Pro Forma Consolidated Statements of Operations should be read
in conjunction with the financial statements and the related notes thereto of
Gargoyles and of Hobie, which are included elsewhere herein.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
GARGOYLES HOBIE ADJUSTMENTS PRO FORMA FOR OFFERING(4) AS ADJUSTED
--------- ------ ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $17,896 $4,044 $ -- $21,940 $ -- $21,940
Cost of sales.................... 7,017 1,992 -- 9,009 -- 9,009
--------- ------ ----------- --------- ------- -----------
Gross profit..................... 10,879 2,052 -- 12,931 -- 12,931
--------- ------ ----------- --------- ------- -----------
License income................... 480 -- -- 480 -- 480
--------- ------ ----------- --------- ------- -----------
Operating expenses:
Sales and marketing............ 5,934 1,176 -- 7,110 -- 7,110
General and administrative..... 3,030 679 233(1) 3,942 -- 3,942
Shipping and warehousing....... 1,030 35 -- 1,065 -- 1,065
Research and development....... 305 -- -- 305 -- 305
Stock compensation............. 250 -- -- 250 -- 250
--------- ------ ----------- --------- ------- -----------
Total operating expenses..... 10,549 1,890 233 12,672 -- 12,672
--------- ------ ----------- --------- ------- -----------
Income (loss) from operations.... 810 162 (233) 739 -- 739
--------- ------ ----------- --------- ------- -----------
Other income (expense):
Interest expense, net.......... (1,043) (131) (450)(2) (1,624) 1,624(5) --
Recapitalization expenses...... (574) -- -- (574) -- (574)
Provision for loss on (1,597) -- -- (1,597) -- (1,597)
affiliate....................
Other.......................... 7 (15) -- (8) -- (8)
--------- ------ ----------- --------- ------- -----------
Total other income (3,207) (146) (450) (3,803) 1,624 (2,179)
(expense)..................
--------- ------ ----------- --------- ------- -----------
Income (loss) before income (2,397) 16 (683) (3,064) 1,624 (1,440)
taxes..........................
Income tax provision (benefit)... (100) 11 46(3) (43) --(6) (43)
--------- ------ ----------- --------- ------- -----------
Net income (loss)................ $(2,297) $ 5 $ (729) $(3,021) $ 1,624 $(1,397)
========== ====== =========== ========= ======= ==========
Net income (loss) per share...... (.37) (.49) (.18)
========== ========= ===========
Weighted average common shares
used in computation of net
income (loss) per share(7)..... 6,138,260 6,153,894 7,820,561
========== ========= ===========
</TABLE>
17
<PAGE> 20
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
GARGOYLES HOBIE(8) ADJUSTMENTS PRO FORMA FOR OFFERING(4) AS ADJUSTED
--------- -------- ----------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 17,627 $311 $ -- $ 17,938 $ -- $ 17,938
Cost of sales................ 7,386 167 -- 7,553 -- 7,553
--------- -------- ----------- --------- ------- -----------
Gross profit................. 10,241 144 -- 10,385 -- 10,385
--------- -------- ----------- --------- ------- -----------
License income............... 294 -- -- 294 -- 294
--------- -------- ----------- --------- ------- -----------
Operating expenses:
Sales and marketing........ 4,985 77 -- 5,062 -- 5,062
General and 2,078 122 29(1) 2,229 -- 2,229
administrative...........
Shipping and warehousing... 1,071 4 -- 1,075 -- 1,075
Research and development... 333 -- -- 333 -- 333
Stock compensation......... 3,528 -- -- 3,528 -- 3,528
--------- -------- ----------- --------- ------- -----------
Total operating 11,995 203 29 12,227 -- 12,227
expenses...............
--------- -------- ----------- --------- ------- -----------
Income (loss) from (1,460) (59) (29) (1,548) -- (1,548)
operations.................
--------- -------- ----------- --------- ------- -----------
Other income (expense):
Interest expense, net...... (1,161) (13) (57)(2) (1,231) 1,231(5) --
Other...................... -- 1 -- 1 -- 1
--------- -------- ----------- --------- ------- -----------
Total other income (1,161) (12) (57) (1,230) 1,231 1
(expense)..............
--------- -------- ----------- --------- ------- -----------
Income (loss) before income (2,621) (71) (86) (2,778) 1,231 (1,547)
taxes......................
Income tax provision -- (24) 24(3) -- --(6) --
(benefit)..................
--------- -------- ----------- --------- ------- -----------
Net income (loss)............ $ (2,621) $(47) $(110) $ (2,778) $1,231 $ (1,547)
========== ========= ============ ========== ======= ===========
Net income (loss) per
share...................... (.43) (.45) (.20)
========== ========== ===========
Weighted average common
shares used in computation
of net income (loss) per
share(7)................... 6,141,836 6,153,894 7,820,561
========== ========== ===========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To record the amortization of intangibles associated with the Hobie
Acquisition. For purposes of calculating goodwill and related amortization,
the allocation of the purchase price using the purchase method of accounting
is based on the fair value of the assets and liabilities of Hobie that were
acquired. The most significant component of intangibles is goodwill that is
being amortized over the remaining 27-year license period of the Hobie brand
name.
(2) To record interest expense for the period prior to the acquisition of debt
incurred in the Hobie Acquisition.
(3) Reflects adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation in 1995, and adjustments for income
taxes to a consolidated provision for both periods presented.
(4) The adjustments for the Offering do not reflect a nonrecurring $300,000
bonus to be paid to an executive officer in connection with an employment
agreement, which will be expensed concurrently with the closing of the
Offering. See "Management -- Employment and Change-in-Control Agreements."
(5) Reflects the estimated reduction in interest expense on indebtedness
expected to be repaid from the estimated net proceeds of the Offering.
(6) No tax effect was reflected in the adjustments for the Offering. The Company
has deferred tax assets that are fully reserved and exceed the tax effect of
the Offering adjustments. This reserve was reversed to the extent of the tax
effect of the Offering adjustments.
(7) Computed on the basis described in Note 1 to the Company's Consolidated
Financial Statements and to reflect the issuance of shares in connection
with the Hobie Acquisition and the Offering.
(8) Includes the results of operations for Hobie for the period January 1, 1996
through February 13, 1996, the date of the Hobie Acquisition.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Financial Data," "Pro Forma Financial Information" and the Company's and Hobie's
financial statements and the related notes thereto, which are included elsewhere
in this Prospectus.
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year-end. In the following discussion, references to
1993, 1994 and 1995 are to the 12-month fiscal years ended November 30, 1993 and
1994 and December 31, 1995, respectively. The results of operations for the one-
month period ended December 31, 1994 are presented in the Company's Consolidated
Financial Statements which are included elsewhere in this Prospectus.
COMPANY HISTORY
Background. The Company was founded by Dennis L. Burns (the "Founder") to
develop a sunglass style that not only would cover and protect the eyes more
effectively than traditional "flat" lens designs, but also would minimize
distortion. In 1983, the Company completed its development of the patented dual
lens toric curve technology and introduced its first product, the Gargoyles
Classic. Until 1992, the Company was a successful single-product company with
relatively few resources devoted to expanding its product line, and was
dependent on independent manufacturers' representatives to sell its products. In
May 1992, the Company began installing a new management team. The new management
team (i) hired a number of experienced senior executives and mid-level managers;
(ii) focused on developing new products designed to exploit the patented dual
lens toric curve technology; (iii) pursued a growth strategy centered around
aggressive new product introductions; (iv) began investing in its own direct
sales force to expand distribution; and (v) implemented a more focused and
aggressive marketing and advertising strategy to enhance the Gargoyles' brand
image. Primarily as a result of these initiatives, the Company has achieved
significant increases in sales.
Recapitalization. In a March 22, 1995 recapitalization (the
"Recapitalization"), an investor group (the "Investors") led by Trillium
Corporation ("Trillium") acquired a controlling interest in the Company. See
"Certain Transactions." In the Recapitalization, the Company (i) borrowed $6.0
million pursuant to a bank loan guaranteed by Trillium; (ii) sold approximately
3.5 million shares of its Common Stock to the Investors in exchange for $5.4
million, of which $900,000 was paid in cash and $4.5 million was paid in the
form of a promissory note from Trillium; and (iii) redeemed approximately 3.5
million shares of Common Stock from the Founder for $10.9 million, of which $6.4
million was paid in cash and $4.5 million was paid in the form of a promissory
note to the Founder. The $4.5 million note receivable and the $4.5 million note
payable and related interest have been offset for financial reporting purposes.
In January 1996, the obligations evidenced by the Company's note to the Founder
and Trillium's note to the Company were satisfied in full. In connection with
the Recapitalization, the Company recorded a charge of $574,000 relating to
severance, legal and other costs and recorded noncash deferred compensation of
$400,000 related to the amendment of an option agreement, which was amortized
over the vesting period. See "-- General" and "Certain Transactions --
Recapitalization Transaction."
Hobie Acquisition. In February 1996, the Company acquired the Hobie
sunglass business for $3.4 million. Hobie manufactures polarized sunglasses
under the Hobie brand name pursuant to a long-term license agreement from Hobie
Designs, Inc. In addition, as consideration for certain noncompetition
covenants, the Company agreed to pay an aggregate of $200,000 in 12 monthly
installments and issued an aggregate of 15,634 shares of its Common Stock to two
of Hobie's former shareholders. The Company also agreed to pay consulting
service fees of up to an aggregate of $300,000 to these two shareholders,
contingent upon the achievement by Hobie of certain sales objectives in 1996 and
1997. In addition, during 1998 these shareholders may require the Company to
repurchase their shares for an aggregate of $200,000 if the Company has not
completed a public offering by December 31, 1997. The Hobie Acquisition was
funded by proceeds of a bank loan, which Trillium guaranteed. See "Certain
Transactions -- Other Transactions." Following the Hobie Acquisition, the
Company relocated Hobie's operations to the Company's facility in Kent,
Washington.
19
<PAGE> 22
Timberland Transaction. In May 1996, the Company, together with Douglas W.
Lauer, former president of Revo, a subsidiary of Bausch & Lomb, and Timberland,
formed Kindling, a majority-owned subsidiary of the Company, to design, develop,
manufacture and distribute sunglasses and, with Timberland's consent, ophthalmic
frames under the Timberland brand name. Concurrently with Kindling's formation,
the Company and Kindling, jointly and severally, acquired an exclusive,
worldwide (except for Benelux, Cyprus, Israel and Scandinavia) license from
Timberland to use the Timberland and tree logo trademarks on sunglasses, eyewear
accessories and, with Timberland's consent, ophthalmic frames. The Company
contributed $1.2 million for its 70% interest in Kindling. Of that amount,
$100,000 was paid in cash and $1.1 million by means of a non-interest-bearing
promissory note that is payable in installments through January 1997, a portion
of which will be paid with the net proceeds of the Offering. The license
agreement with Timberland expires on December 31, 2000 with options to renew by
the Company, assuming certain conditions are met and subject to provisions for
earlier termination. Under certain circumstances, Timberland may require
Kindling to repurchase all of Timberland's 10% interest in Kindling. In
addition, upon the achievement of certain operating objectives, Mr. Lauer and
certain other key employees of Kindling may be granted up to an aggregate of 10%
of Kindling's common stock owned by the Company. Trillium has agreed to make
advances of up to $400,000 to fund the Company's 1996 capital obligations to
Kindling. To date, Trillium has advanced $100,000 in each of June and July 1996,
which are due, with interest at 12% per annum, on September 30, 1996 (the
"Kindling Loan"). See "Certain Transactions -- Other Transactions." The Company
and Mr. Lauer are currently formulating the strategy with respect to the
Timberland product line; the Company anticipates that sales of Timberland
branded products will begin in 1997.
Conquest Asset Sale and Liquidation. Prior to the Recapitalization, both
the Company and Conquest were majority-owned by the Founder. Conquest's core
business has been the design, manufacture, distribution and sale of sports
helmets. At the time of the Recapitalization, shares of Conquest's common stock
were sold by the Founder to substantially the same investor group that purchased
Common Stock in the Recapitalization. See "Certain Transactions -- Conquest
Transactions." The Company has advanced funds to Conquest and has guaranteed
certain liabilities of Conquest. Management has concluded that it is likely that
Conquest will be unable to meet its obligations and, therefore, the Company has
recorded a provision in the fourth quarter of 1995 of $1.6 million representing
the write-off of the Company's receivable from Conquest and a reserve for other
potential payments of Conquest liabilities, including certain Conquest
indebtedness which Gargoyles has guaranteed. In June 1996, Conquest sold certain
of its assets for a purchase price of approximately $600,000 plus the assumption
of certain liabilities. Conquest is in the process of liquidating its remaining
assets.
Discontinued Distribution Agreement. During late 1994, the Company entered
into a nonexclusive agreement to distribute a line of sunglasses produced by
another manufacturer. These sunglasses were produced under a license agreement
with a major manufacturer of athletic shoes and apparel. The Company had no
significant sales under this agreement prior to 1995. The Company's results of
operations for 1995 include net sales of $758,066, cost of sales of $490,011 and
sales and marketing expenses of $579,972 related to this agreement. During the
fourth quarter of 1995, both parties agreed to terminate this agreement.
GENERAL
The Company introduced its first product in December 1983. Since the
Company's new management was put in place in 1992, the Company's net sales have
grown significantly, from $6.3 million in 1992 to $17.9 million in 1995. For the
first six months of 1996, net sales increased 93% to $17.6 million compared to
the same period for 1995. The Company attributes its net sales growth primarily
to the introduction of new products, growth of sunglass specialty retailers
(principally Sunglass Hut), sales efforts focused on opening new accounts and
increased brand recognition. The Company's number of active accounts increased
from in excess of 1,800 in 1993 to approximately 2,800 in 1995. The Company's
annual net sales per active account increased at a compounded annual growth rate
of approximately 19% from $4,519 in 1993 to $6,433 in 1995.
In April 1995, the Company entered into a license agreement (the "License
Agreement") whereby it, as licensor, receives quarterly cash payments based on
the portion of the licensee's income from the sale of certain products. The
Company also received a $1.0 million payment at the inception of the License
20
<PAGE> 23
Agreement. After deducting expenses associated with the License Agreement, the
$720,000 balance was recorded as deferred license income, and is being amortized
over a four-year term. The quarterly cash payments, and the amortization of
deferred license income, are reported as license income on the Company's
consolidated financial statements.
Hobie was acquired by the Company on February 13, 1996 and was accounted
for as a purchase. Results of Hobie are therefore included in the Company's
consolidated financial statements for the period ended June 30, 1996 only for
the period from February 14, 1996 to June 30, 1996. Results for the period from
January 1, 1996 until the date of the Hobie Acquisition and results for Hobie
for 1995 and 1994 are also included in the financial statements contained in
this Prospectus.
Pursuant to an agreement dated January 5, 1994, among Gargoyles, the
Founder and Mr. Hauff, the Founder granted Mr. Hauff a nonqualified option to
purchase 10% of the Common Stock from the Founder. In connection with the
Recapitalization, the provisions of the option agreement were amended to
eliminate the option's expiration date, unless the Company closed an initial
public offering, in which case the option would immediately vest and expire. The
amended option was subsequently assumed by the Investors. See "Certain
Transactions--Other Transactions." As a result of the amendment, the Company was
required to recognize deferred compensation of $400,000, which was expensed over
the option vesting period. Also in connection with the Recapitalization, the
Investors granted Mr. Hauff an additional nonqualified option to purchase
146,500 shares of the Common Stock owned by the Investors at an exercise price
of $4.26 per share. In June 1996, in contemplation of the Offering, the
Investors further amended Mr. Hauff's option agreements to accelerate the
vesting and to extend the expiration date to June 28, 2006. As a result, the
remaining balance of $150,000 from the initial $400,000 deferred compensation
was expensed and Gargoyles recognized an additional nonrecurring, noncash stock
compensation charge of $3.4 million in the second quarter of 1996.
Antone provided assembly operations for Gargoyles prior to the
Recapitalization and was merged into Gargoyles in connection with the
Recapitalization. The merger was accounted for as a pooling-of-interests due to
common ownership. Prior to the Recapitalization, Antone was taxed as an S
corporation. Accordingly, Antone's taxable income included in the Company's
consolidated financial statements is treated as if it were distributed to the
Founder, who is responsible for payment of taxes thereon. The Company did not,
therefore, pay taxes on Antone's taxable income prior to the Recapitalization.
A nonrecurring $300,000 bonus to an executive officer, in connection with
an employment agreement, to be paid upon the closing of the Offering, will be
expensed concurrently with the closing of the Offering. See
"Management -- Employment and Change-in-Control Agreements." In addition,
unamortized loan fees, which were $123,000 at June 30, 1996, associated with
debt to be retired with a portion of the net proceeds of the Offering, will be
expensed concurrently with the repayment of the debt immediately after the
Offering.
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------- SIX MONTHS
ENDED
NOVEMBER 30, JUNE 30,
--------------- DECEMBER 31, ---------------
1993 1994 1995 1995 1996
----- ----- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 39.4 38.5 39.2 38.1 41.9
----- ----- ----- ----- -----
Gross profit.................................. 60.6 61.5 60.8 61.9 58.1
License income................................ -- -- 2.7 3.2 1.7
Operating expenses:
Sales and marketing......................... 26.8 27.4 33.2 30.7 28.3
General and administrative.................. 17.6 23.1 16.9 14.6 11.8
Shipping and warehousing.................... 5.3 5.5 5.8 4.7 6.0
Research and development.................... 2.6 1.1 1.7 1.4 1.9
Stock compensation.......................... -- -- 1.4 1.7 20.0
----- ----- ----- ----- -----
Total operating expenses................. 52.3 57.1 59.0 53.1 68.0
----- ----- ----- ----- -----
Income (loss) from operations................. 8.3% 4.4% 4.5% 12.0% (8.2)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net sales. Net sales increased to $17.6 million for the six months ended
June 30, 1996 from $9.1 million for the six months ended June 30, 1995. This
increase was primarily the result of (i) new product introductions, including
the Helios models in March 1995 and the Paladin, Vortex and Octane models in
1996, (ii) sales increases in most existing product lines, (iii) an increase in
the number of active accounts resulting from the Company's sales efforts, and
(iv) sale of Hobie products in the 1996 period, subsequent to the Hobie
Acquisition, totaling approximately $3.0 million. The change in the Company's
product mix associated with new product introductions and the inclusion of the
Hobie product lines contributed to a 3% increase in the total average selling
price in the 1996 period on unit growth of 84%.
Gross profit. Gross profit increased to $10.2 million for the six months
ended June 30, 1996 from $5.6 million for the six months ended June 30, 1995.
Gross margin decreased to 58.1% in the 1996 period from 61.9% in the 1995
period. The decline in gross margin in 1996 was attributable, in part, to large
purchases by Sunglass Hut and growth in sales to new distributors, both of which
receive higher volume discounts than the Company's other accounts. The Company's
sales to Sunglass Hut totaled approximately 37% of the Company's net sales
compared to a historical level of approximately 33%. In addition, the decrease
in gross margin in 1996 resulted from lower gross margin for Hobie. Hobie's
lower gross margin resulted primarily from sales pricing and component costs in
place at the time of the Hobie Acquisition in February 1996. The decrease in
gross margin in 1996 also resulted from unanticipated cost increases from one
frame supplier and resulting increases in production costs at the Company. The
Company is replacing this supplier with a new, lower-cost supplier.
License income. License income increased to $294,000 for the six months
ended June 30, 1996 from $290,000 for the six months ended June 30, 1995.
Operating expenses. Operating expenses increased to $12.0 million for the
six months ended June 30, 1996 from $4.8 million for the six months ended June
30, 1995. As a percentage of net sales, operating expenses increased to 68.0% in
the 1996 period, which included stock compensation of $3.5 million or 20.0% of
net sales, from 53.1% in the 1995 period. Excluding this stock compensation,
operating expenses as a percentage of net sales decreased to 48.0% for the 1996
period. Sales and marketing expenses increased $2.2 million in the 1996 period,
primarily as a result of salaries and commissions associated with higher sales
levels and increases in marketing and warranty expenditures. As a percentage of
net sales, sales and marketing
22
<PAGE> 25
expenses decreased to 28.3% in the 1996 period from 30.7% in the 1995 period due
to the slower growth of these expenses compared to net sales. General and
administrative expenses increased $743,000 in the 1996 period, as the Company
continued to add personnel and the infrastructure necessary to support its
growth. As a percentage of net sales, general and administrative expenses
decreased to 11.8% in the 1996 period from 14.6% in the 1995 period, due to
greater leverage of the Company's overhead. Stock compensation increased to $3.5
million in the 1996 period from $155,000 in the 1995 period. See "-- General."
Income (loss) from operations. The Company's loss from operations of
($1.5) million for the six months ended June 30, 1996 compared to income from
operations of $1.1 million for the six months ended June 30, 1995 primarily as a
result of the nonrecurring, noncash stock compensation charge in the 1996
period.
Interest expense, net. Net interest expense increased to $1.2 million for
the six months ended June 30, 1996 from $400,000 for the six months ended June
30, 1995. This increase resulted from substantially higher debt incurred in the
Recapitalization in March 1995 and the Hobie Acquisition in February 1996, and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Income tax provision (benefit). The Company's income tax benefit was zero
for the six months ended June 30, 1996 compared to an income tax provision of
$5,000 for the six months ended June 30, 1995. Differences from the federal
statutory income tax rate of 34% resulted primarily in 1996 from increases in
the reserve against certain tax assets and, in 1995, the inclusion of Antone's
earnings in income (loss) before income taxes. The Company was not subject to
income tax on Antone's earnings because Antone was an S corporation.
Net income (loss). As a result of the items discussed above, the Company's
net loss was ($2.6) million for the six months ended June 30, 1996 compared to
net income of $128,000 for the six months ended June 30, 1995.
Hobie. Net sales of Hobie sunglasses were $3.3 million for the six months
ended June 30, 1996 compared to $2.3 million for the six months ended June 30,
1995. Hobie's income from operations increased to $753,000 for the six months
ended June 30, 1996 from $172,000 for the six months ended June 30, 1995.
Hobie's operating expenses in the 1996 period included amortization of goodwill
and noncompete agreement costs totaling $57,000. Hobie's net loss for the period
from January 1 to February 13, 1996 was $47,000. This loss resulted primarily
from the seasonality of Hobie's business.
Year Ended December 31, 1995 Compared to Year Ended November 30, 1994
Change in fiscal year-end. In 1995, the Company changed its reporting
period from a fiscal year ending November 30 to a calendar year. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's Consolidated Financial Statements. Because the Company's business is
seasonal, the results of operations for December are not indicative of results
for other months in the year.
Net sales. Net sales increased to $17.9 million for the year ended
December 31, 1995 from $11.1 million for the year ended November 30, 1994. This
increase was primarily the result of (i) new product introductions, including
the Helios models, (ii) sales increases in most existing product lines, and
(iii) an increase in the number of active accounts resulting from the Company's
sales efforts. The change in the Company's product mix contributed to a 15%
increase in the total average selling price of Gargoyles eyewear in 1995 on unit
growth of 38%.
Gross profit. Gross profit increased to $10.9 million for the year ended
December 31, 1995 from $6.8 million for the year ended November 30, 1994. Gross
margin decreased to 60.8% in 1995 from 61.5% in 1994. This margin decrease
resulted in part from unanticipated cost increases from one frame supplier and
resulting increases in production costs at the Company in the 1995 period. The
decrease in gross margin also resulted in part from the inclusion in the 1995
period of sales of $758,066 under the discontinued distribution agreement which
had a gross margin of 35%. These decreases in gross margin were partially offset
by a
23
<PAGE> 26
reduction in the cost for certain other key components, including temples and
nosebridges for its Classic and 85s models. The Company is replacing the frame
supplier with a new, lower-cost supplier.
License income. The License Agreement was entered into in February 1995,
resulting in license income of $480,000 for 1995.
Operating expenses. Operating expenses increased to $10.5 million for the
year ended December 31, 1995 from $6.3 million for the year ended November 30,
1994. As a percentage of net sales, operating expenses increased to 59.0% in
1995 from 57.1% in 1994. Sales and marketing expenses increased $2.9 million in
1995, primarily as a result of salaries and commissions associated with higher
sales levels and increases in marketing and warranty expenditures. As a
percentage of net sales, sales and marketing expenses increased to 33.2% in 1995
from 27.4% in 1994, reflecting the Company's increased investment in its direct
sales force. General and administrative expenses increased $472,000 in 1995, as
the Company continued to add personnel and the infrastructure necessary to
support its growth. As a percentage of net sales, general and administrative
expenses decreased to 16.9% in 1995 from 23.1% in 1994. General and
administrative expenses in 1994 were impacted by several investments the Company
made, including the expenses associated with moving into a new facility and
investments in personnel and the infrastructure necessary to support its
anticipated growth. Stock compensation totaled $250,000 for 1995.
Income from operations. The Company's income from operations increased to
$810,000 for the year ended December 31, 1995 from $485,000 for the year ended
November 30, 1994. As a percentage of net sales, income from operations
increased to 4.5% in 1995 from 4.4% in 1994. This increase was the result of the
Company's net sales growth and license income, partially offset by the decrease
in gross margin and the increase in operating expenses.
Interest expense, net. Net interest expense increased to $1.0 million for
the year ended December 31, 1995 from $176,000 for the year ended November 30,
1994. This increase resulted from debt incurred in the Recapitalization and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Provision for loss on affiliate. During 1995, the Company recorded a $1.6
million provision for the loss on Conquest. Gargoyles has advanced funds to, and
guaranteed certain liabilities of, Conquest. This provision included the
write-off of the funds advanced, and the establishment of a liability for the
Company's potential payment of certain Conquest liabilities. See "-- Company
History" and "Certain Transactions -- Conquest Transactions."
Income tax provision (benefit). The Company's income tax benefit was
($100,000) for the year ended December 31, 1995, compared to an income tax
provision of $10,000 for the year ended November 30, 1994. Differences from the
federal statutory income tax rate of 34% resulted primarily from increases in
the reserve against certain tax assets and the inclusion of Antone's earnings in
income (loss) before income taxes. The Company was not subject to income tax on
Antone's earnings because Antone was an S corporation.
Net income (loss). The Company's net loss was $2.3 million for the year
ended December 31, 1995, compared to net income of $299,000 for the year ended
November 30, 1994. This decrease resulted principally from increased interest
expense and nonrecurring recapitalization expenses and nonrecurring provision
for loss on affiliate, partially offset by the increased income from operations.
Hobie. Net sales of Hobie sunglasses increased to $4.0 million for the
year ended December 31, 1995 from $3.7 million for the year ended December 31,
1994. Hobie's income from operations increased to $162,000 for the year ended
December 31, 1995 from $84,000 for the year ended December 31, 1994. This
increase was primarily the result of Hobie's net sales growth and gross margin
improvement partially offset by an increase in operating expenses.
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<PAGE> 27
Year Ended November 30, 1994 Compared to Year Ended November 30, 1993
Net sales. Net sales increased to $11.1 million for the year ended
November 30, 1994 from $8.2 million for the year ended November 30, 1993. This
increase was primarily the result of (i) new product introductions, including
the Legends model, and (ii) an increase in the number of active accounts
resulting from the Company's sales efforts. The change in the Company's product
mix contributed to a 14% increase in the total average selling price of eyewear
in 1994 on unit growth of 18%.
Gross profit. Gross profit increased to $6.8 million for the year ended
November 30, 1994 from $5.0 million for the year ended November 30, 1993. Gross
margin increased to 61.5% in 1994 from 60.6% in 1993. This increase was
primarily the result of cost reductions obtained for certain key components,
including temples and nosebridges for its Classic and 85s models.
Operating expenses. Operating expenses increased to $6.3 million for the
year ended November 30, 1994 from $4.3 million for the year ended November 30,
1993. Operating expenses as a percentage of net sales increased to 57.1% in 1994
from 52.3% in 1993. Sales and marketing expenses increased $831,000 in 1994,
primarily as a result of salaries and commissions associated with higher sales
levels and the establishment of the Company's direct sales force. As a
percentage of net sales, sales and marketing expenses increased to 27.4% in 1994
from 26.8% in 1993. General and administrative expenses increased $1.1 million
in 1994, as the Company moved into a new facility and invested in personnel and
the infrastructure necessary to support its growth. As a result, general and
administrative expenses, as a percentage of net sales, increased to 23.1% in
1994 from 17.6% in 1993.
Income from operations. The Company's income from operations decreased to
$485,000 for the year ended November 30, 1994 from $685,000 for the year ended
November 30, 1993. As a percentage of net sales, income from operations
decreased to 4.4% in 1994 from 8.3% in 1993. This decrease was the result of the
Company's increase in operating expenses, partially offset by the net sales
growth and gross margin improvement.
Interest expense, net. Net interest expense increased to $176,000 for the
year ended November 30, 1994 from $55,000 for the year ended November 30, 1993.
This increase resulted primarily from increased borrowings to support
operations.
Income tax provision. The Company's income tax provision decreased to
$10,000 for the year ended November 30, 1994 from $40,000 for the year ended
November 30, 1993. Differences from the federal statutory income tax rate of 34%
primarily resulted from the inclusion of Antone's earnings in income (loss)
before income taxes. The Company was not subject to income tax on Antone's
earnings because Antone was an S corporation.
Net income. Net income decreased to $299,000 for the year ended November
30, 1994 from $592,000 for the year ended November 30, 1993. This decrease
resulted from the decreased income from operations and increased interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from operations and
borrowings to finance its operations. As described below, since March 1995,
Trillium has guaranteed certain of the Company's loans and from time to time has
made certain other loans to the Company. In addition, prior to the
Recapitalization, Antone, which was merged into the Company, made S corporation
distributions to the Founder from Antone's earnings. Cash provided by (used in)
the Company's operating activities, primarily to fund the growth in accounts
receivable and inventories, totaled $300,000 and ($400,000) for the years ended
November 30, 1993 and 1994, respectively, ($2.8) million for the year ended
December 31, 1995 and ($2.7) million for the six months ended June 30, 1996.
Cash provided by (used in) the Company's investing activities, primarily to fund
capital expenditures, and, in the six months ended June 30, 1996, to fund the
Hobie Acquisition, totaled ($200,000) and ($700,000) for the years ended
November 30, 1993 and 1994, respectively, ($1.3) million for the year ended
December 31, 1995 and ($4.4) million for the six months ended June 30, 1996.
Cash provided by (used in) the Company's financing activities, primarily
proceeds from bank debt and, in the year ended
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<PAGE> 28
December 31, 1995, proceeds from the stock issuance in the Recapitalization,
totaled ($400,000) and $1.0 million for the years ended November 30, 1993 and
1994, respectively, $4.1 million for the year ended December 31, 1995 and $7.1
million for the six months ended June 30, 1996. As of June 30, 1996, the Company
had a working capital deficit of $5.0 million, including $13.9 million of
indebtedness to be repaid with a portion of the net proceeds from the Offering.
Gargoyles has a revolving line of credit with a bank (the "Credit
Facility") that matures on March 22, 1997. Effective June 25, 1996, the Company
could borrow under the Credit Facility up to the lesser of (i) an amount that,
together with outstanding interest, does not exceed the total of 80% of eligible
accounts receivable and 50% of eligible inventories and (ii) $11.0 million.
Borrowings under the Credit Facility bear interest at the bank's prime rate plus
1.0% per annum (9.25% at June 30, 1996), payable monthly. Amounts borrowed under
the Credit Facility are secured by all tangible and intangible personal property
of the Company. Proceeds from borrowings under the Credit Facility were used by
the Company to support operations. As of June 30, 1996, the Company had
borrowings of $7.5 million under the Credit Facility. The Credit Facility
requires, among other things, that the Company maintain a minimum tangible net
worth and working capital and meet certain ratios relating to debt coverage. As
of June 30, 1996, the Company was in compliance with the covenants. The Company
will repay the balance outstanding under the Credit Facility with a portion of
the net proceeds from the Offering. At that time, the Credit Facility will be
replaced with a $10 million unsecured revolving line of credit with a more
favorable interest rate.
In connection with the Recapitalization, the Company borrowed $6.0 million
in an acquisition loan (the "Recapitalization Loan") from a bank. These funds
were used, along with the proceeds from the sale of Common Stock to the
Investors, to repurchase stock from the Founder. The Recapitalization Loan bears
interest at the bank's prime rate plus 1.50% per annum (9.75% at June 30, 1996),
payable monthly. Principal payments are payable quarterly in the amount of
$230,769 through March 2002. The Recapitalization Loan is guaranteed by
Trillium. As of June 30, 1996, the Company had borrowings of $5.5 million under
the Recapitalization Loan. Additionally, a note payable of $283,100 was issued
to the Founder, bearing interest at 10% per annum. Gargoyles paid interest only
on a monthly basis through September 1995. Beginning in October 1995, the note
became payable in monthly installments of principal and interest of $10,704
through March 1998.
In connection with the Hobie Acquisition, the Company borrowed $4.0 million
in an acquisition loan (the "Hobie Acquisition Loan") from a bank. These funds
were primarily used to purchase all the outstanding stock of Hobie. On June 26,
1996, the Company borrowed an additional $1.0 million under the Hobie
Acquisition Loan, the proceeds of which were used for general working capital.
The Hobie Acquisition Loan bears interest at the bank's prime rate plus 3.0% per
annum (11.25% at June 30, 1996), payable monthly. A $700,000 principal payment
is due September 30, 1996 and the $4.3 million balance is due December 31, 1996.
In addition, loan fees of (i) 1.0% of the then-outstanding principal balance is
due on September 30, 1996 and (ii) $212,000 is due on December 31, 1996. The
Hobie Acquisition Loan is guaranteed by Trillium. As of June 30, 1996, the
Company had borrowings of $5.0 million under the Hobie Acquisition Loan. If the
Company does not repay the Hobie Acquisition Loan on or before December 31,
1996, it must pay an additional loan fee of $5.0 million or issue a warrant to
purchase that number of shares of the Company's Common Stock that would
constitute 25% of the Common Stock on a fully diluted basis at a purchase price
of $.01 per share (subject to certain antidilution adjustments). If issued, the
warrant would be exercisable by the bank at any time after March 31, 1997 and,
until June 30, 1997, the Company would have the right to redeem the warrant for
an aggregate redemption price of $5.0 million. If the bank were to exercise the
warrant, the bank would have the right, subject to certain limitations, to
require the Company to register its shares of Common Stock.
The Company has also borrowed a total of $1.2 million from a bank, bearing
interest at the bank's prime rate plus 1.25% per annum (9.50% at June 30, 1996),
with interest payable monthly and principal payable quarterly through 2000 (the
"Equipment Loan"). The Equipment Loan was used to finance the purchase of
equipment and is secured by such equipment. As of June 30, 1996, a total of $1.2
million was outstanding under the Equipment Loan.
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<PAGE> 29
The Company intends to repay the Credit Facility, the Recapitalization
Loan, the Hobie Acquisition Loan, the Kindling Loan, the Equipment Loan, the
Settlement Note (see "Certain Transactions -- Recapitalization Transaction") and
certain other indebtedness with a portion of the net proceeds of the Offering.
See "Use of Proceeds" and Note 5 to the Company's Consolidated Financial
Statements.
Antone historically made distributions to the Founder to pay income taxes
on Antone's earnings included in the Founder's taxable income and as a return on
his investment. Antone paid distributions to the Founder of $587,000, $625,000
and $261,000 for the years ended November 30, 1993 and 1994 and December 31,
1995, respectively.
Capital expenditures totaled $1.3 million for the year ended December 31,
1995. The Company anticipates that capital expenditures will total approximately
$1.0 million for the year ending December 31, 1996. Capital expenditures during
1995 and 1996 are primarily for optical molds and production and office
equipment.
The Company believes that cash flow from operations, the net proceeds of
the Offering and available borrowings will be sufficient to meet its operating
needs and capital expenditures for the foreseeable future.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1994 QUARTER ENDED 1995 QUARTER ENDED 1996 QUARTER ENDED
------------------------------------ -------------------------------------- -------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------ ------- ------- ------- ------- -------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $ 1.5 $3.3 $ 3.2 $ 3.1 $ 3.3 $ 5.8 $5.2 $ 3.6 $ 7.0 $10.6
Gross profit.... 0.9 2.0 2.0 1.9 2.0 3.6 3.3 2.0 4.1 6.1
</TABLE>
The Company's net sales generally have been higher in the period from March
to September, the period during which sunglass purchases are highest. As a
result, operating income is typically lower in the first and fourth quarters as
fixed operating costs are spread over lower sales volume. In anticipation of
seasonal increases in demand, the Company typically builds inventories in the
fourth quarter, when net sales have historically been lower. The Company also
experiences higher accounts receivable during March through September as a
result of higher sales during this period. This increase in accounts receivable
does not have a significant effect on the Company's liquidity due to the
Company's ability to borrow against these receivables under the Credit Facility.
See "-- Liquidity and Capital Resources." The Company's quarterly results of
operations have fluctuated in the past and may continue to fluctuate as a result
of a number of factors, including seasonal cycles, the timing of new product
introductions, the timing of orders by the Company's customers, the mix of
product sales and the effects of weather conditions on consumer purchases. See
"Risk Factors -- Economic Conditions; Quarterly Fluctuations; Seasonality."
BACKLOG AND BACKORDERS
Since mid-1994, the Company has experienced a significant increase in
backlog (which represents all unshipped orders, regardless of the scheduled
shipping date) and occasional increases in backorders (which represent orders
for merchandise remaining unshipped beyond its scheduled shipping date). As of
June 30, 1996, the Company's backlog was approximately $1.8 million,
approximately $1.0 million of which represented backorders. The Company expects
to fill orders relating to substantially all backlog at June 30, 1996 by the end
of 1996. As of June 30, 1995, the Company's backlog was approximately $1.3
million.
The occasional increases in backorders have been due to increases in the
market demand for Gargoyles products, which have temporarily exceeded either the
capacity of the Company's lens and frame suppliers or the Company's internal
production capacity. Prior to the Recapitalization, the Company did not have
sufficient capital to maintain an adequate supply of certain key components,
which resulted in an increase in backorders in the months preceding and
immediately following the Recapitalization. The Recapitalization increased the
Company's access to capital, thereby allowing it to reduce backorders and
further develop adequate inventory levels. The Company has been taking actions
since the Recapitalization to reduce the
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<PAGE> 30
potential of future backorders. In particular, Gargoyles has worked with its
suppliers to increase the level of production of Gargoyles products, has added
new suppliers and has increased its own production capacity through the addition
of personnel and equipment. In addition, in late 1995 the Company refocused its
product offerings on the most popular frame and lens color combinations,
allowing the Company to narrow the stock-keeping units offered, thereby reducing
the potential for future backorders. See "-- Liquidity and Capital Resources,"
"Risk Factors -- Ability to Sustain and Manage Growth" and "-- Reliance on
Limited Sources of Supplies," "Business -- Manufacturing" and "Use of Proceeds."
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<PAGE> 31
BUSINESS
INTRODUCTION
Gargoyles designs, manufactures and markets a broad line of performance and
outdoor lifestyle-oriented sunglasses. The Company competes in the rapidly
growing premium sunglass market by offering a diverse line of products at
suggested retail prices of $80 to $190. The Company seeks to distinguish
Gargoyles brand products in the marketplace by combining innovative styling with
its patented dual lens toric curve technology, which the Company believes is the
most advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 41% from 1992 through 1995.
For the first six months of 1996, the Company achieved growth in net sales of
93% compared to the same period in the prior year.
The Company was founded to develop a sunglass style that not only would
cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes refraction associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with virtually no change in direction. This dual lens design provides
each eye with its own optical center of focus, permitting a wraparound design
without sacrificing overall optical clarity or introducing distortion. The
Company believes this proprietary technology offers the most advanced and
optically correct sunglass lens design available in wrap sunglasses and provides
a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
The Company has also leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996,
which broadened the Company's technology base to include polarized sunglasses.
Further, in May 1996, the Company, together with the former president of Revo,
entered into a worldwide license agreement with Timberland to design,
manufacture and market sunglasses under the Timberland brand name. The Company
believes the worldwide appeal of the Timberland brand name will assist the
Company in further penetrating the outdoor-lifestyle market segment. Management
believes that the addition of these brands to the Company's portfolio of
products will provide incremental synergies in sales, marketing, distribution,
manufacturing and general and administrative expenses.
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<PAGE> 32
INDUSTRY OVERVIEW
According to the Sunglass Association of America, total retail sunglass
sales in the domestic sunglass market grew approximately 64% from $1.4 billion
in 1989 to $2.3 billion in 1995. The industry is generally divided into two
principal segments: the under $30 market and the over $30 premium market. The
premium sunglass market, the category in which the Company competes, showed an
increase in total retail sales of approximately 82% from $824 million in 1989 to
$1.5 billion in 1995. The average retail price per unit for premium sunglasses
has increased during this period, contributing significantly to the overall
growth of the segment.
The Company believes that the key factors driving the historical growth in
the premium sunglass market include increased consumer awareness of the need for
quality eye protection in response to heightened health concerns, increased
demand for technologically advanced, yet stylish products, increased demand for
specialized sunglasses for different sports and activities, growing brand
awareness among eyewear consumers and continuous product replacement.
The Company believes that an additional factor affecting the growth of the
premium sunglass market is the growth of sunglass specialty retailers, primarily
Sunglass Hut, the industry's largest sunglass specialty retailer. Sunglass Hut
has grown rapidly through internal expansion and acquisitions, increasing from
156 stores at February 1, 1988 to 1,726 locations at February 3, 1996. In
addition to growing its store base, Sunglass Hut's comparable store net sales
increased 10.3% and 13.5% for its 1995 and 1994 fiscal years, respectively. The
Company also believes that the percentage of sales through the sunglass
specialty channel, its primary channel, is increasing relative to other
channels. Based on information provided by Sunglass Hut, the Company believes
that sales of sunglasses through sunglass specialty retailers increased from
approximately 31% of total domestic sunglasses sales in 1994 to approximately
37% in 1995.
The Company believes that Oakley and Bausch & Lomb comprised approximately
50% of the domestic premium sunglass market in 1995, with several companies,
including Gargoyles, having smaller but significant market shares. The remainder
of the industry is highly fragmented and comprised of numerous smaller
companies. The Company expects that as the sunglass industry continues to grow,
a certain amount of consolidation will occur. The Company believes such
consolidation will enable certain companies to achieve sufficient scale to
invest increased amounts in research and development, develop direct sales
forces, market products effectively in an increasingly competitive environment
and maintain adequate inventory levels to deliver products on a reliable basis
to rapidly growing specialty retailers. Consolidation of smaller manufacturers
by larger, well-capitalized vendors is consistent with the desire of large
retail customers, notably Sunglass Hut, to do business with vendors who provide
dependable, timely delivery and adequate supply of products.
BUSINESS STRATEGIES
The Company's objective is to be one of the premier designers,
manufacturers and marketers of performance and outdoor lifestyle-oriented
premium sunglasses and protective eyewear. To achieve this goal, the Company has
developed and is implementing business strategies to capitalize on growth
opportunities within the premium sunglass market. Key elements of the Company's
business strategies are as follows:
Offer technologically superior products. The Company's products are
designed to capitalize on several unique technological features that
differentiate Gargoyles' products from those of its competitors. The
sophisticated geometry of the Company's patented lens design provides each eye
with its own optical center of focus, permitting a wraparound design with wide
coverage without sacrificing overall optical clarity or introducing distortion.
The Company's primary lens material is polycarbonate, which is significantly
stronger than safety glass, yet lightweight and able to provide protection from
damaging ultraviolet light. The Company also offers Hobie polarized sunglasses,
which are designed to block glare more effectively than regular sunglasses.
Additionally, the Company's patented interchangeable lens system used in its
Legends products allows the consumer to adopt multiple styles and functions
through the use of different lenses in the same frame.
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<PAGE> 33
Design innovative products. The Company continuously strives to
differentiate its products from those of competitors through new product
introductions. The Company positions its products to appeal to both active
sports enthusiasts who favor the performance features of its products and
consumers who appreciate Gargoyles' distinctive styling and innovative designs.
The Company has recently added the Vortex and Octane models for the sports
market segment, which the Company believes is currently one of the fastest
growing segments in the premium sunglass market. In addition, the recent
introduction of the Paladin model has augmented the Company's strength in the
broader style-conscious market.
Increase brand name recognition. The Company seeks to heighten awareness
of its brands as high-quality, technology-based performance sunglasses. The
Company's unique styles and designs, featuring its dual lens toric curve
technology, differentiate its products from rival brands. To further strengthen
its brand image, the Company maintains strict control over the distribution of
its products and has implemented a marketing strategy focused on enhancing the
retail presentation of its products. This strategy includes training retail
salespersons to fully understand the benefits and features of the Company's
products and in-store education highlighting the style and technical features of
its products. In addition, the Company creates broad exposure for its products
through the endorsements by well-known professional athletes such as Dale
Earnhardt, Ken Griffey Jr., Alexi Lalas and Scottie Pippen and through the use
of its protective eyewear products by, and tie-in promotions with, the actors on
the popular television series ER.
Expand distribution network. In 1994, the Company began investing in a
direct sales force to expand distribution and gain more control over the sales
process. The Company has recently augmented its distribution capabilities with
the addition of a number of optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated sporting goods and optical stores markets. The Company believes
that the strategic expansion of its distribution network permits its direct
sales force to focus on the Company's existing customer base and add new
accounts. The Company anticipates that the addition of the Hobie and Timberland
product lines will allow for broadened distribution to new and existing
customers who desire these new products.
Implement vertical integration strategy. The Company currently depends on
multiple vendors in geographically diverse areas to perform its molding,
hard-coating and mirroring processes for its lenses. The Company anticipates
centralizing many of these processes by implementing a vertical integration
strategy. The Company's goals in implementing this strategy include more
efficient manufacturing, improvement in gross margins, manufacturing products in
accordance with its strict quality-control standards and increasing control over
the timing and delivery of its products. Processes for which vertical
integration is not effective will continue to be contracted out to vendors.
GROWTH STRATEGIES
Management believes that its strategies have positioned the Company to
achieve continued growth in revenues and earnings. Key elements of the Company's
growth strategies include the following:
Capitalize on growth in premium sunglass market. The Company will continue
to focus on increasing its penetration within the premium sunglass segment,
which has grown approximately 82% from 1989 to 1995. Management believes that
this segment will continue to experience rapid growth. The Company also expects
to benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut. The
Company believes that as large sunglass specialty retailers continue to grow,
they will increasingly require well-capitalized vendors which are able to
provide adequate product supply on a reliable basis.
Develop and introduce new products. The Company is committed to
capitalizing on its existing market position and proprietary technology by
developing new products and product line extensions that incorporate superior
performance and unique styling. To support its new product initiatives, the
Company maintains an active research and development effort, which has resulted
in the introduction of eight product lines since 1993. In 1996, new product
introductions included the Paladin titanium frame for the style-conscious market
and the Octane and Vortex plastic frames for the sports market. In 1997, the
Company anticipates introducing a number of new models of polarized sunglasses
under the Hobie brand name to capitalize on the growing
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<PAGE> 34
awareness among consumers of the performance features of polarized lenses.
Further, in 1997 the Company anticipates introducing its lifestyle-oriented
Timberland brand product line.
Expand customer base. The Company is focused on expanding its customer
base both domestically and internationally. The strategies of adding a direct
sales force dedicated to selling the Company's products and adding additional
manufacturers' representatives and distributors have resulted in significant
growth in the number of accounts, including sunglass specialty, sporting goods,
department and optical stores. Since the addition of a direct sales force in
1994, the Company has added over 1,000 new accounts. The Company now has
approximately 3,100 accounts representing over 7,000 retail locations or
outlets. The Company believes there are still significant opportunities to
expand its customer base both in the United States and internationally.
Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary competitors.
The Company's international growth plans are based on developing international
distribution networks and investing in overseas operations, where appropriate.
In addition, the Company believes the worldwide appeal of the Timberland brand
name will facilitate introduction of the Company's products internationally.
Management also expects the international expansion of Sunglass Hut will assist
in increasing the Company's international presence.
Selectively pursue acquisition and licensing opportunities. The Company
seeks to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The focus
of the Company's acquisition licensing efforts is to (i) augment the Company's
product lines, (ii) enhance the Company's distribution capabilities, (iii)
leverage the Company's operating infrastructure, and (iv) access new technology.
In particular, the Company's acquisition and integration of Hobie and its
license agreement with Timberland provide new brand names and a broader customer
base, and create distribution and operating synergies.
DUAL LENS TORIC CURVE TECHNOLOGY
The key technological feature of the Company's eyewear is its patented dual
lens toric curve design. This proprietary design offers a foundation for product
innovation that can overcome the optical deficiencies in competitive wrap
sunglasses, and permits the Company's sunglasses to match the contours of the
face without sacrificing overall optical clarity or introducing distortion. The
complex geometry of the Company's dual toric curve lens minimizes the refraction
associated with other extreme wrap lens designs by allowing the transmission of
light directly to the eyes with virtually no change in direction. Competitive
spherical or unitary wrap lens designs, which do not use the Company's dual
toric curve lens, may cause light refraction, resulting in distortion, which can
cause eye fatigue and eye stress.
In addition, the Company's dual lens design provides separate optical
centers of focus for each eye, resulting in greater overall optical clarity and
less peripheral distortion. Competitive unitary wrap sunglasses have a single
optical center near the physical center of the lens located between the eyes,
which often introduces distortion that may cause eye fatigue and eye stress.
<TABLE>
<CAPTION>
LIGHT TRANSMISSION OF LIGHT TRANSMISSION
GARGOYLES' DUAL LENS OF COMPETITIVE
TORIC CURVE DESIGN UNITARY LENS DESIGN
----------------------------------- -----------------------------------
<S> <C>
[Diagram depicting light [Diagram depicting light
transmission through dual toric transmission through competitive
curve lens] lens]
Dual optical center Single optical center
</TABLE>
The Company believes that its dual lens toric curve technology provides the
most advanced and optically correct lens design available in wrap sunglasses.
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<PAGE> 35
PRODUCTS
The Company markets its sunglass models under the Gargoyles and Hobie
brands, and is developing products to market under the Timberland brand
beginning in 1997 pursuant to the license agreement with Timberland. The Company
offers an extensive selection of high-quality sunglasses in the middle to upper
price points of the premium market ($80 to $190 retail), thereby allowing the
Company to market to a broad customer base.
GARGOYLES BRAND SUNGLASSES
The Company currently offers nine product lines under the Gargoyles brand
name, all of which are available in a variety of colors and with mirrored and
nonmirrored lenses. Each Gargoyles product line, except for the Legends lines,
utilizes the Company's patented dual lens toric curve technology.
<TABLE>
<CAPTION>
SUGGESTED
RETAIL
PRODUCT LINE INTRODUCTION DESCRIPTION PRICE POINTS
- --------------------- --------------- -------------------------------------------- ------------
<S> <C> <C> <C>
Classic December 1983 Original dual lens toric curve design. $80-$175
85s May 1993 Same design as the Classic design but 15% $80-$175
smaller.
Legends March 1994 Utilizes a patented interchangeable lens $125-$165
system with 14 lens options.
Helios Full Frame March 1995 Contemporary performance sunglass combining $120-$140
the optically correct oval toric curve lens
with a sleek wrapback design.
Helios Anti-Frame March 1995 Sleek, lightweight frameless design $90-$100
utilizing dual lens toric curve wrap.
Legends II August 1995 Smaller, sleeker version of the Legends with $125-$145
six lens options.
Paladin March 1996 Lightweight, fashion/performance design $170-$190
featuring titanium frames.
Vortex April 1996 Lightweight, aerodynamic nylon frame $80-$85
designed for "extreme" sport use.
Octane May 1996 Lightweight, aerodynamic nylon composite $85-$95
frame designed for "mainstream" sport use.
</TABLE>
[additional column containing diagrams of sunglasses]
Classic. Introduced in December 1983, the Classic was the Company's first
sunglass. The uniqueness of the Classic style is based on several features,
including its polycarbonate dual lens toric curve and its wrap design, which
provide superior eye protection and optical clarity. The Classic was worn by
Arnold Schwarzenegger in The Terminator and Clint Eastwood in Sudden Impact.
85s. Introduced in May 1993, the 85s were designed to respond to increased
consumer demand for a smaller version of the Classic. The 85s style is 15%
smaller and is designed to fit a slimmer face.
Legends. Introduced in March 1994, the Legends line combines a classic
shape with the sports performance wrap sunglass of the 1990s. The Legends'
patented interchangeable lens system allows the wearer to adjust to changing
light and to adopt multiple styles and functions through the use of 14 different
lens combinations.
Helios Full Frame. Introduced in March 1995, the Helios Full Frame is
designed to meet the increasing market demand for high-quality, style-conscious
performance eyewear. This model, along with the Helios Anti-Frame line, is the
industry's first oval wrap sunglass designed with a dual lens toric curve. The
Helios Full Frame products also feature spring hinges and adjustable nose pads,
which produce a superior level of fit and comfort.
Helios Anti-Frame. Introduced in March 1995, the Helios Anti-Frame is a
contemporary performance sunglass featuring a sleek, lightweight frameless
design utilizing the dual lens toric curve.
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<PAGE> 36
Legends II. Introduced in August 1995, the Legends II line offers the same
interchangeable lens system and classic design of the Legends line in a smaller,
sleeker style. The Legends II line includes six combinations of interchangeable
lenses.
Paladin. Introduced in March 1996, the Paladin is a high-end,
style-conscious sunglass with a sports influence that features a titanium frame,
providing durability in a lightweight frame weighing only four-tenths of an
ounce. The Paladin line incorporates the dual lens toric curve and an
antireflective lens coating to reduce glare.
Vortex. Introduced in April 1996, the Vortex line features a lightweight,
aerodynamic design targeted for "extreme" sport use by the youth market. The
Vortex incorporates the polycarbonate dual lens toric curve with lightweight
nylon frames.
Octane. Introduced in May 1996 as a mainstream sports sunglass, the Octane
line features the dual lens toric curve and lightweight nylon composite frames.
As a part of the Company's endorsement strategy, the Company uses the names
of athletes to broaden brand name recognition by creating "signature" series of
products. These products currently include The Griffey Wrap and Dale Earnhardt's
signature models. In addition, a number of the Company's models are available
with customized nosebridge decals and/or temples that can tailor a product for
specific corporate promotions.
HOBIE BRAND SUNGLASSES
In February 1996, the Company acquired Hobie, a leading manufacturer and
distributor of polarized sunglasses. Polarized lenses are designed to block
glare more effectively than regular lenses, thereby providing a technological
differentiation from other sunglasses. The Hobie Acquisition provides the
Company with access to the growing market for polarized sunglasses. The Company
believes this market growth is based on greater consumer recognition of the
benefits of polarized sunglasses, the relative ease of demonstrating the
technological differentiation of the lens and the increasing market acceptance
of the higher-priced polarized sunglasses. The Company also believes that its
strategy to aggressively market prescription polarized products will capitalize
on the demographics of aging consumers with active outdoor lifestyles.
The Hobie sunglass collection is divided into three product lines, Sport,
Lites and Elites, each designed to appeal to a different user group.
Substantially all Hobie sunglasses are available with prescription lenses.
<TABLE>
<CAPTION>
SUGGESTED
PRODUCT RETAIL
LINE DESCRIPTION PRICE POINTS
- ------- ------------------------------------------------------------------------------ ------------
<S> <C> <C>
Sport Classic polarized glass lens sunglass line for sport use, including fishing. $98-$150
Lites Contemporary polarized sunglass line for active sports. $78-$128
Elites Polarized glass lens sunglass line with lifestyle-orientation. $148-$192
</TABLE>
Sport. The Sport line consists of 12 models with nylon frames and polarized
glass lenses designed for sport use. The Sport line also includes a line of
products designed specifically for fishing. Selected styles in the fishing
series are available with plastic lenses.
Lites. The Lites line consists of 10 models designed for active sport use.
The Lites products feature plastic polarized lenses. These sunglasses utilize
lightweight, sturdy nylon, metal or carbon frames.
Elite. The Elite line consists of eight models designed as a durable,
lifestyle-oriented sunglass featuring high-quality nylon or metal frames and
polarized glass lenses.
PROTECTIVE EYEWEAR
The Company established its Protective Eyewear division in 1994 to
capitalize on the growing demand for the Company's Arctic Clear product line, a
clear lens version of the Classic and 85s models. The Company's initial efforts
have focused on the medical and dental market segments, where the features and
benefits of Arctic Clear eyewear provide superior optical quality and comfort to
the healthcare professional. The Company believes that protective eyewear is
growing in importance as a market segment due primarily to increasing health
concerns in the medical and dental markets. Management believes that the
Company's
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<PAGE> 37
Arctic Clear products appeal to users who regularly wear protective eyewear for
extended periods, therefore demanding glasses that are more fashionable and
comfortable.
The Company currently distributes its protective eyewear line through its
existing retail channels and through a number of medical and dental
distributors. The Company promotes retail sales of its Arctic Clear products
through product use by, and tie-in promotions with, the actors on the television
series ER. The Company expects to expand the market potential for its Arctic
Clear protective eyewear through the development and introduction of a
prescription insert for its Classic and 85s models that will fit inside the
glasses' lenses, enabling consumers to use these products as prescription
eyewear.
TIMBERLAND
In May 1996, the Company, together with the former president of Revo, and
Timberland, formed Kindling, a majority-owned subsidiary, to design, manufacture
and market sunglasses and, with Timberland's consent, ophthalmic frames under
the Timberland brand name. The Company, together with Kindling, acquired an
exclusive license from Timberland to use the Timberland and tree logo trademarks
on sunglasses, eyewear accessories and, with Timberland's consent, ophthalmic
frames. The Company and Mr. Lauer are currently formulating the strategy with
respect to the Timberland product line; the Company anticipates that sales of
Timberland branded products will begin in 1997. See "Risk Factors -- Potential
Inability to Successfully Integrate Acquisitions and Licensed Products."
ACCESSORIES
The Company's accessory line includes a variety of products, including hard
cases, replacement lenses and eyeglass retainers. This line is distributed in
conjunction with the Company's sunglass product lines.
PRODUCT DESIGN AND DEVELOPMENT
The Company strives to be an innovator in the development of new product
styles that incorporate the Company's patented technologies. The Company's
products are designed by internal research and development personnel with input
from the Company's sales and marketing departments and from consumer focus
groups. The development process commences with the conceptual design of
potential products, including design sketches, drawings and models. The design
team then uses state-of-the-art CAD/CAM equipment to develop three-dimensional
prototypes of new designs. In formulating its design concepts, the Company
strives to develop unique styles based on its patented dual lens toric curve
technology and focuses its efforts on producing performance eyewear products
that are among the most functional, fashionable and durable in the industry. As
a part of this strategy, the Company has successfully developed new products by
cutting different lens shapes and sizes from the Classic lens. These initiatives
have shortened the time associated with the concept, prototype and production
stages of the product development cycle.
The Company is now focused on the introduction of one to three new product
models per year. The Company expands its model lines by adding certain product
extensions, such as new lens and frame colors, new mirrors, interchangeable
lenses and soft nose pieces. The Company's strategy is to delay its line
extension until it is confident of consumer acceptance of the new model, which
has enabled the Company to avoid excess inventory and to manufacture and
assemble its products more effectively.
MANUFACTURING
The Company currently sources its lenses, optical frames and components
from a diverse group of suppliers in the United States, Japan and Europe. Lenses
for Gargoyles products are molded, hard-coated and mirrored by a network of
suppliers in the United States and Japan. Frames for Gargoyles' products are
currently produced by a network of suppliers in Italy and Japan. Lenses and
frames for the Company's Hobie product line are sourced from Asia and Europe and
are assembled in the United States. Related components are generally purchased
from vendors in the United States. The Company has established strong
relationships
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<PAGE> 38
with its major suppliers. The Company intends to vertically integrate certain
aspects of its manufacturing processes. Management believes that such vertical
integration will result in more efficient manufacturing and improved gross
margins, and will provide the Company with more control over the timing and
delivery of its products. Processes that are unlikely to add these benefits
through vertical integration will continue to be contracted out to vendors. See
"-- Business Strategies -- Implement Vertical Integration Strategy" and "Risk
Factors -- Reliance on Limited Sources of Supplies" and "-- Risks Associated
With Vertical Integration Strategy."
Gargoyles assembles the majority of its products at the Company's facility
located in Kent, Washington. Performing assembly functions in-house enables the
Company to control the production process and to maintain its strict
quality-control standards to reduce spoilage and improve product performance.
The Company owns and maintains most of its assembly equipment. With respect to
products assembled by the Company's suppliers, the products are delivered to the
Company for quality control, packaging and shipping.
The Company strives to maintain dual or multiple sources of supply for all
components and services for its sunglass product lines. The Company has also
established contingency plans and identified alternative sources of supply for
many of its components. However, the Company relies on a single source of supply
for several of its components, including its frames. The major raw material used
to produce the majority of the Company's lenses, custom lexan polycarbonate, is
in limited supply in world markets and is purchased on the Company's behalf by
its lens molders. See "Risk Factors -- Reliance on Limited Sources of Supplies."
The optical molds used to develop the Company's toric curve-based lenses
are difficult to manufacture. Due to the precise optical geometry involved,
requiring unique curvatures of both the horizontal and vertical radii, as well
as the front and rear lens surfaces, the mold-polishing function is a
time-consuming, iterative process that must be finished by hand. The process
provides a degree of competitive protection to the Company because the design is
extremely difficult and costly to replicate. All optical molds used to
manufacture Gargoyles brand lenses are owned by the Company, contributing to a
consistent, dependable source of supply.
The Company manages its inventory for its Gargoyles products using an
automated inventory management system that assists in controlling reorder points
and minimum and maximum stock levels, thereby ensuring better in-stock
availability and a higher level of salable product. Other benefits of this
system include lowering average inventories and reducing associated carrying
costs. The Company is in the process of integrating its Hobie products into the
automated inventory management system.
For information concerning backlog and backorders, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Backlog and Backorders."
DISTRIBUTION
To preserve the integrity of the Company's brand names, the Company
selectively limits its distribution to retailers that market products consistent
with the Company's image and pricing strategy and that provide a high level of
customer service and technical expertise. Individual accounts are selected based
on their potential ability to positively represent the Company's brands and
technological benefits, reputation for advertising prices at or near the
manufacturer's suggested retail price, expected ability to display a wide
assortment of the Company's product selections and demonstrated commitment to
merchandising and product knowledge that will support the Company's brand image.
The Company believes that sunglass specialty retailers represent the largest and
fastest growing distribution channel for sunglasses, and expects significant
growth in sunglass sales by sunglass specialty stores. The Company currently
sells Gargoyles and Hobie eyewear through approximately 3,100 accounts
representing over 7,000 retail locations or outlets comprised primarily of
sunglass specialty stores, optical stores, department stores and sporting goods
stores.
The Company believes that international distribution represents a
significant opportunity for increased product sales. Although the Company has
not historically focused on the international marketplace, it has achieved
recent international sales growth as a result of targeting existing distributors
for increased sales volume and developing new distributor relationships selling
into previously untapped international markets.
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<PAGE> 39
The Company intends to focus its expansion efforts in Europe through the
establishment of an international distribution network, and to leverage
potential distribution synergies with the Company's international manufacturing
suppliers. Future plans potentially involve a direct sales force in selected
countries and the investment in marketing and overseas operations where
appropriate. The Company also expects the worldwide growth of Sunglass Hut to
assist in its international expansion.
SALES
Prior to March 1994, Gargoyles' selling efforts were conducted principally
by manufacturers' representatives who were responsible for product lines from
multiple companies. In March 1994, the Company began investing in a direct sales
force, which had an immediate impact on revenue growth and has played a
significant role in positioning the Company for long-term sustainable revenue
growth. The direct sales force has grown from ten individuals in April 1994 to
30 individuals as of May 1, 1996. The sales force currently includes territory
sales managers, national accounts sales managers and sales associates, as well
as international and protective eyewear sales teams. The Company believes that
the benefits of its direct sales force include greater focus and more effective
control, direction, responsiveness and motivation throughout the entire sales
management process. Furthermore, the Company views its direct sales force as a
key asset and continuously seeks to add new products to leverage its investment
in its sales force. Examples of this strategy include the Hobie Acquisition and
the license agreement with Timberland, both of which allow the Company to
provide new products to its growing customer base through its established sales
force.
The Company's direct sales force is responsible for managing all sales
activities and executing the Company's sales, marketing and promotional
strategies. Sales personnel directly call on sunglass specialty retailers,
department stores and large optical chains. Sales force functions include daily
sales calls focused on increasing business with existing accounts and opening
new accounts. This includes educating and training retailers and their employees
to effectively communicate the key features and benefits of the Company's
products and to execute strategic merchandising programs. Sales personnel are
compensated based on a combination of base salary and bonus.
In January 1996, the Company made the strategic decision to expand its
distribution network to include key optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated optical stores and sporting goods markets. These distributors
and manufacturers' representatives represent both Gargoyles and Hobie product
lines. The Company believes that the strategic expansion of its distribution
network will provide its direct sales force with greater ability to increase its
focus on the Company's existing customer base and to achieve greater account
penetration.
MARKETING AND PROMOTION
Prior to the Recapitalization, the Company devoted few resources to
marketing and promotion. Over the past year, the Company has significantly
increased its marketing efforts, with increased marketing expenditures, new
personnel and new promotional programs. The Company's marketing department
develops all aspects of advertising, marketing and promoting the Company's
products. In addition, the marketing team participates in the new product
development process.
The Company believes that marketing programs developed in cooperation with
its key customers, including Sunglass Hut, are a critical part of the Company's
success. The Company's marketing professionals work with these customers to
design distinctive retail presentations and promotions and to develop marketing
materials to educate store employees as to the features and benefits of the
Company's products. In addition, the Company provides its customers with product
and video presentations that feature the Company's latest products.
The Company uses endorsements by professional athletes to promote its
products and brand image by highlighting the sports efficacy of its designs. The
Company's athlete endorsement strategy focuses on selecting athletes who are
highly acclaimed in their respective sports to wear and promote the Company's
sunglasses. Athletes work in partnership with the Company to contribute to the
successful development and marketing of the Company's products. Athletes
currently under contract include such well-known names as
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<PAGE> 40
seven-time NASCAR champion Dale Earnhardt, baseball superstar and "presidential
candidate" Ken Griffey, Jr., international soccer superstar Alexi Lalas, Olympic
gold-medalist skier Tommy Moe, NBA superstar Scottie Pippen and world champion
snowboarders Michael Jacoby and Michele Taggart. In key situations, the Company
uses the names of athletes to increase brand recognition by creating a
"signature" series of products. These products currently include The Griffey
Wrap and Dale Earnhardt's signature models. The Company's strategy also includes
the use of the Company's protective eyewear on the popular television series ER,
which it promotes through an endorsement contract providing for tie-in
promotions with the ER actors.
CUSTOMER SERVICE
The Company's management is committed to achieving customer satisfaction
and encouraging repeat business by providing a high level of knowledgeable,
attentive and personalized customer service. The Company has implemented
extensive employee training designed to ensure that its customer service
representatives, and other key personnel who interface with the Company's
customers, are thoroughly familiar with the technical, lifestyle and functional
elements of the Company's product offerings. Management believes that the
Company's responsive customer service effort has created goodwill and loyalty
among its customers and, as a result, contributes to the strength of Gargoyles'
reputation in the marketplace.
PRINCIPAL CUSTOMERS
Net sales to the Company's 10 largest customers during the year ended
December 31, 1995 and the six months ended June 30, 1996 accounted for
approximately 54% of net sales in both periods. Sunglass Hut, the Company's
largest customer, accounted for approximately 32% and 37% of the Company's net
sales for the same periods (including sales to Sunsations, which was acquired by
Sunglass Hut in July 1995). As of May 31, 1996, the Company's products are sold
in more than 1,650 Sunglass Hut locations throughout the United States. While
the Company does not have a purchase agreement with Sunglass Hut, the Company
believes that its relations with this customer are good. Each year the Company
and Sunglass Hut develop a joint plan for promotional, marketing and sales
objectives. See "Risk Factors -- Dependence on Sunglass Hut."
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trade dress, trademark and copyright laws to protect its
intellectual property, including product designs, proprietary manufacturing
processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through the acquisition of patents and
trademark registrations, the maintenance of trade secrets, the development of
trade dress (the "look and feel" of a product) and, where appropriate,
litigation against those who are, in the Company's opinion, infringing its
rights.
Patents and Trademarks. As of May 15, 1996, the Company had been issued
three U.S. utility patents and one U.S. design patent relating to eyewear,
including patents directed to the dual lens toric curve technology. As of May
15, 1996, the Company had three utility patent applications and three design
patent application pending in the United States and one utility patent
application pending internationally. The Company intends to file additional
patent applications, when appropriate, relating to improvements in its
technology and other specific products and processes developed by the Company.
As of May 15, 1996, the Company had registered four U.S. trademarks and
three international trademarks relating primarily to the name Gargoyles. In
addition, the Company has licensed the right to use the Hobie and the Timberland
and tree logo trademarks for use on eyewear products pursuant to the terms of
the license agreements with Hobie and Timberland. Due to the Company's strict
quality-control standards and the desire to protect its proprietary technology
and prevent overexposure of its trademarks, the Company has not licensed its
trademarks for use by other parties for the manufacture and sale of sunglass
products.
While there can be no assurance that the Company's patents or trademarks
protect its proprietary information and technologies, the Company intends to
continue to assert its intellectual property rights against
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<PAGE> 41
any infringer. Although the Company's assertion of its rights could result in
substantial cost to, and diversion of effort by, the Company, management
believes that protection of the Company's intellectual property rights is a key
component of the Company's business strategy. The Company is currently a party
in litigation matters concerning certain of its intellectual property rights.
See "-- Litigation" and "Risk Factors -- Risks Associated With Proprietary
Rights."
Trade Secrets. The Company also relies on unpatented trade secrets for the
protection of certain intellectual property rights. The Company protects its
trade secrets by requiring its employees, consultants and other agents and
advisors to execute confidentiality agreements upon the commencement of
employment or other relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information or adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and technologies, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets.
COMPETITION
The Company competes primarily in the premium segment of the
nonprescription sunglass market, which is fragmented and highly competitive. The
Company competes with a number of established companies, including Bausch &
Lomb, the marketer of the Ray Ban, Killer Loop, Arnette and Revo brands, and
Oakley, which together control approximately 50% of the premium market segment,
as well as Luxottica Group S.P.A., Safilo USA Inc. and Bolle America, Inc. In
the polarized sunglass segment, the Company competes against Maui Jim and Costa
del Mar brands, as well as the polarized products sold by other sunglass
manufacturers. The Company also competes in the market for premium protective
eyewear, primarily against Bolle America, Inc., and against lower-priced
products produced by Uvex Safety, Inc. and Titmus Optical, Inc. Several of these
companies in the premium sunglass and protective eyewear markets have
substantially greater resources and better name recognition than the Company and
sell their products through broader and more diverse distribution channels. The
Company could also face competition from new competitors, including established
branded consumer products companies, such as Nike, Inc., that also have greater
financial and other resources than the Company. In addition, as the Company
expands internationally, it will face substantial competition from companies
that have already established their products in international markets and
consequently have significantly more experience in those markets than the
Company.
The premium sunglass market is susceptible to rapid changes in consumer
preferences that could affect acceptance and sales of the Company's products.
The major competitive factors include fashion trends, brand recognition, methods
of distribution and the number and range of products offered. In addition, to
retain and increase its market share, the Company must continue to be
competitive in the areas of quality, performance, technology, intellectual
property protection and customer service. See "Risk Factors -- Highly
Competitive Market."
EMPLOYEES
As of May 31, 1996, the Company had 221 employees, of which 71 were
full-time salaried, 103 were full-time hourly and 47 were part-time hourly. The
Company is not a party to any labor agreement and none of its employees is
represented by a labor union. The Company considers its relationship with its
employees to be excellent, and has never experienced a work stoppage.
PROPERTIES
The Company's corporate headquarters and its production, warehousing and
distribution facilities are located in Kent, Washington and consist of two
leased buildings totaling approximately 29,000 square feet of space. See
"Certain Transactions."
Management believes that the Company's facilities are currently operating
near maximum capacity and that such facilities will not be sufficient to meet
the Company's future operating needs. The Company
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anticipates that all or a portion of its operations will be relocated in 1997 to
a larger facility. As a result, any delays or interruptions in the Company's
manufacturing processes or other operations could have a material adverse effect
on the Company. See "Risk Factors -- Potential Inability to Sustain and Manage
Growth."
LITIGATION
In February 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Peter and Jane Doe LaHaye,
LaHaye Laboratories, Inc. and NEOPTX, Inc. relating to the potential
infringement of the Company's patent for an adhesive magnification insert to
eyewear products. In April 1996, the defendants counterclaimed seeking a
declaration that the patent is not valid and not infringed. The Company believes
that such litigation will not have a material adverse effect on its operations
or financial position.
In May 1996, a notice of opposition was filed against the Company in the
United States Patent and Trademark Office by Mobil Oil Corporation seeking the
denial of the Company's trademark application to use the Gargoyles mark for
souvenir products. While it is too early to determine the outcome of this
action, the Company believes that this notice of opposition would not affect the
Company's existing trademark registration for the Gargoyles mark.
For information concerning a lawsuit brought by the Company against the
U.S. government, see "Certain Transactions -- Other Transactions."
The Company also is a party to various other claims, complaints and legal
actions that have arisen in the ordinary course of business from time to time.
The Company believes that the outcome of all such pending legal proceedings, in
the aggregate, will not have a material adverse effect on its operations or
financial position.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages as of July 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Executive Officers and
Directors
Douglas B. Hauff........... 43 President, Chief Executive Officer and Director
G. Travis Worth............ 50 Chief Operating Officer
David W. Jobe.............. 36 Senior Vice President, Sales
Steven R. Kingma........... 39 Vice President, Chief Financial Officer, Secretary and
Treasurer
Douglas W. Lauer........... 42 President and Chief Executive Officer, Kindling
Bruce E. Meckling.......... 42 Vice President, International
Erik J. Anderson(1)........ 37 Chairman of the Board
Timothy C. Potts(1)........ 47 Director
William D. 64 Director
Ruckelshaus(2)...........
Paul S. Shipman(2)......... 43 Director
Walter F. Walker(1)........ 41 Director
Key Employees
Charles A. Bernheiser...... 57 Vice President, Design, Research and Development
Janice D. Gaub............. 34 Vice President, Marketing
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
All the current directors of the Company, except Messrs. Ruckelshaus,
Shipman and Walker, were elected to the Board of Directors pursuant to a
shareholders agreement entered into in connection with the Recapitalization. See
"Certain Transactions." Upon the effective date of the Offering, the
shareholders agreement will automatically terminate.
The Company's Board of Directors will be divided into three classes at the
first annual meeting of shareholders following the Offering. After a
transitional period, each director will serve for a three-year term and one
class will be elected each year by the Company's shareholders. Directors hold
office until their terms expire and their successors are elected and qualified.
Executive officers of the Company are appointed by, and serve at the direction
of, the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
Douglas B. Hauff has been President, Chief Executive Officer and a Director
of the Company since June 1996. Between his joining the Company in May 1992 and
June 1996, Mr. Hauff was the Company's President and a Director. Mr. Hauff has
also been President and a director of Conquest since May 1992. From September
1990 to April 1992, Mr. Hauff was Senior Vice President of Frederick & Nelson
Inc. ("Frederick & Nelson"), a department store chain operator. Mr. Hauff was a
Senior Vice President and Division President of McCaw Cellular Communications, a
telecommunications company, between August 1986 and July 1988, President of
Interstate Mobile Phone d/b/a Cellular One, a telecommunications company,
between October 1984 and July 1986 and President of Executone, a Northwest
telecommunications firm, between September 1981 and September 1984.
G. Travis Worth has been Chief Operating Officer of the Company since June
1996. From October 1995 until June 1996, Mr. Worth was the Company's Senior Vice
President. From August 1989 to October 1995, Mr. Worth was the Vice President,
Sales for the Ray-Ban Eyewear Division of Bausch & Lomb. From 1981 to 1989, Mr.
Worth was Vice President, Sales and Marketing of Technica USA Ski Boot Company,
a manufacturer of ski equipment.
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<PAGE> 44
David W. Jobe, Senior Vice President, Sales, joined the Company in February
1994. From May 1988 to January 1994, Mr. Jobe was employed by MEDI-TECH, Inc., a
subsidiary of Boston Scientific Corporation, a medical device company, initially
as Denver territory manager, then as a regional manager from June 1990 to
December 1992 and as Western Division Manager from January 1993 to January 1994.
From January 1985 through April 1988, Mr. Jobe was employed by The Procter &
Gamble Company in a number of sales management capacities.
Steven R. Kingma, Vice President, Chief Financial Officer, Secretary and
Treasurer, joined the Company in September 1994. From September 1993 to
September 1994, Mr. Kingma was employed at Jay Jacobs, Inc., the operator of a
chain of specialty retail apparel stores, in various financial positions, most
recently as its Senior Vice President, Chief Financial Officer and Treasurer
from May 1994 to September 1994. From August 1992 to September 1993, Mr. Kingma
owned and operated Pacific Financial Management, a financial and professional
consulting services business. From January 1990 to July 1992, Mr. Kingma was
employed by Frederick & Nelson as Director of Finance. From September 1979 to
January 1990, Mr. Kingma was employed by Price Waterhouse, a public accounting
firm.
Douglas W. Lauer, President and Chief Executive Officer of Kindling, joined
the Company in June 1996 in connection with the license agreement with
Timberland. Previously, Mr. Lauer was President of Revo, a subsidiary of Bausch
& Lomb, from July 1989 to May 1996. Mr. Lauer formerly served in a number of
management capacities for Polo Ralph Lauren Corporation.
Bruce E. Meckling, Vice President, International, joined the Company in
July 1996. From 1980 to July 1996, Mr. Meckling was employed by Bausch & Lomb's
Europe, Middle East and Africa division. Mr. Meckling was employed as General
Manager of Distributor Operations and Bausch & Lomb Germany GmbH from 1993 to
July 1996, as Commercial Director of Distributor Operations from 1992 to 1993
and as Marketing Director of Distributor Operations from 1990 to 1992. Prior to
1990, Mr. Meckling was employed in a number of marketing and financial
capacities.
Erik J. Anderson has been a Director of the Company since March 1995 and
was named Chairman of the Board in July 1995. Mr. Anderson has been Chief
Executive Officer of Trillium, a corporation with investments primarily in
timber and real estate, since January 1996, was its Co-President from January
1995 to January 1996 and its Executive Vice President from February 1994 to
January 1995. From March 1992 to January 1994, Mr. Anderson was a partner of
Frazier & Company, a merchant bank. From October 1990 to March 1992, Mr.
Anderson was a Vice President of Service Group of America, a food distribution
and insurance company. Mr. Anderson is also a director of Smart Modular
Technologies, Inc.
Timothy C. Potts has been a Director of the Company since March 1995. Mr.
Potts has been Senior Vice President -- Finance of Trillium since July 1994.
From April 1987 to July 1994, Mr. Potts was the Chief Financial Officer of
Trillium.
William D. Ruckelshaus has been a Director of the Company since July 1996.
Since March 1996, Mr. Ruckelshaus has been a principal of the Madrona Investment
Group, L.L.C., a private investment firm. Mr. Ruckelshaus is also Chairman of
the Board of Browning-Ferris Industries, Inc., a waste services company, and
from October 1988 to October 1995 was its Chief Executive Officer. From 1983 to
1985, Mr. Ruckelshaus was Administrator of the Environmental Protection Agency
and from 1979 to 1983, a Senior Vice President of Weyerhaeuser Co. Mr.
Ruckelshaus is also a director of Cummins Engine Co., Monsanto Company,
Nordstrom, Inc. and Weyerhaeuser Co.
Paul S. Shipman has been a Director of the Company since June 1996. Mr.
Shipman has been President since September 1981, Chairman of the Board since
November 1992 and Chief Executive Officer since June 1993 of Redhook Ale
Brewery, Incorporated ("Redhook"), a brewer of craft beers.
Walter F. Walker has been a Director of the Company since December 1995.
Since September 1994, Mr. Walker has been the President of the Seattle
Supersonics National Basketball Association basketball team, owned by a
subsidiary of Ackerley Communications, Inc. From March to September 1994, he was
President of Walker Capital, Inc., a money management firm. From July 1987 to
March 1994, Mr. Walker was a Vice President of Goldman, Sachs & Co., a
registered broker-dealer. From 1976 to 1985, Mr. Walker
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<PAGE> 45
was a professional basketball player in the National Basketball Association. Mr.
Walker is also a director of Redhook and Interpoint Corporation.
Charles A. Bernheiser, Vice President, Design, Research and Development,
joined the Company in April 1992. Mr. Bernheiser has been associated with the
optical industry for more than 30 years in many capacities, including extensive
experience with Corning Incorporated, American Optical Corp. and Liberty
Optical. Mr. Bernheiser also designed, established and managed the initial
Gargoyles production facility as an independent contractor prior to joining the
Company in 1992.
Janice D. Gaub, Vice President, Marketing, joined the Company in September
1995. From October 1993 to May 1995, Ms. Gaub was Director of Marketing and
Customer Service for Nile Spice Foods, Inc., a manufacturer of spices and food
products. From August 1989 to October 1993, she was a Product Manager at Paragon
Trade Brands, Inc., a manufacturer of private label disposable diapers.
Frederick & Nelson, a company for which Mr. Hauff served as Senior Vice
President and Mr. Kingma served as Director of Finance, filed a voluntary
petition for Chapter 11 bankruptcy in September 1991 and was liquidated by order
of the bankruptcy court in 1992. Jay Jacobs, Inc., a company for which Mr.
Kingma was employed in various financial positions, filed a voluntary petition
for Chapter 11 bankruptcy protection in May 1994 and emerged therefrom in
November 1995.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Company has two standing committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to the
Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors. The Compensation Committee determines officer and director
compensation and administers the Company's benefit plans.
Each nonemployee director of the Company who does not beneficially own 5%
or more of the Company's outstanding voting securities and who is not an
officer, director or employee of any entity that beneficially owns 5% or more of
the Company's outstanding voting securities receives an annual retainer of
$4,000, and $250 for attending each committee meeting of the Board. For
information concerning a warrant to purchase shares of Common Stock granted to
Walter F. Walker in December 1995, see "Certain Transactions." In January 1996,
Mr. Walker also received a stock option to purchase 2,344 shares of Common Stock
at an exercise price of $4.26 per share. In July 1996, the Company granted each
of Paul S. Shipman and William D. Ruckelshaus an option to purchase 2,344 shares
of Common Stock at an exercise price of $6.82 per share. In the future, as
compensation for their services, the Company intends to grant to each of its
outside directors, both on initial appointment to the Board and on an annual
basis thereafter, an option to purchase approximately 2,344 shares of Common
Stock at exercise prices equal to the fair market value of the Common Stock at
the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Hauff, the Company's President and Chief Executive Officer, is a member
of the Compensation Committee of the Company's Board of Directors. Mr. Hauff
also served as a director, President and a member of the Compensation Committee
of Conquest during fiscal 1995. For information concerning certain transactions
between Mr. Hauff and the Company, see "Certain Transactions."
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<PAGE> 46
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company in the
fiscal year ended December 31, 1995 to the Company's Chief Executive Officer and
the other executive officers who earned in excess of $100,000 in salary and
bonus during fiscal 1995 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION -------------------
------------------ SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------------- -------- ------- ------------------- ------------
<S> <C> <C> <C> <C>
Douglas B. Hauff, President and Chief
Executive Officer(1)....................... $225,000 $50,000 0 $ 14,229(2)
David W. Jobe, Senior Vice President,
Sales...................................... 83,750 32,500 107,952 8,504(3)
Steven R. Kingma, Vice President and Chief
Financial Officer.......................... 93,750 25,000 46,264 7,871(4)
</TABLE>
- ---------------
(1) Mr. Hauff was named Chief Executive Officer in June 1996. During 1995, no
executive officer of the Company held the title of Chief Executive Officer.
(2) Represents (i) $5,171 in matching 401(k) plan contributions by the Company,
(ii) $3,696 for life insurance and disability premiums, and (iii) $5,362
for dependent health insurance premiums.
(3) Represents (i) $2,993 in matching 401(k) plan contributions by the Company,
(ii) $149 for disability insurance premiums, and (iii) $5,362 for dependent
health insurance premiums.
(4) Represents (i) $2,369 in matching 401(k) plan contributions by the Company,
(ii) $162 for disability insurance premiums, and (iii) $5,340 for dependent
health insurance premiums.
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1995.
No stock options were granted by the Company to Mr. Hauff during fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE 5% 10%
- ------------------------------ ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David W. Jobe................. 61,682(4) 12.8% $ 3.24 03/22/05 $125,684 $318,509
46,270(5) 9.6 3.24 12/08/05 94,281 238,926
Steven R. Kingma.............. 30,841(4) 6.4 3.24 03/22/05 62,842 159,254
15,423(4) 3.2 3.24 12/08/05 31,426 79,640
</TABLE>
- ---------------
(1) All options were granted at fair market value at the date of grant.
(2) Based on a total of 481,013 options granted to employees in fiscal 1995.
(3) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission (the "Commission") for illustrative purposes only and
are not intended to forecast or predict future stock prices.
(4) These options vest monthly over a four-year period.
(5) These options vest monthly over a four-year period upon the achievement of
certain operating objectives or at the end of five years.
1995 Year-End Option Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1995. The following table sets forth certain
information regarding unexercised stock options
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<PAGE> 47
held by each of the Named Executive Officers as of December 31, 1995. Mr. Hauff
held no stock options granted by the Company as of December 31, 1995. For a
discussion of certain options granted to Mr. Hauff by certain shareholders of
the Company, see "Certain Transactions."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Jobe.................................... 11,565 96,387 $ 136,005 $ 1,133,511
Steven R. Kingma................................. 5,782 40,482 67,996 476,068
</TABLE>
- ---------------
(1) Calculated on the basis of the assumed initial public offering price of
$15.00 per share, less the exercise price.
BENEFIT PLAN
The purpose of the 1995 Stock Incentive Compensation Plan (the "1995 Plan")
is to enhance the long-term shareholder value of the Company by offering
opportunities to employees, directors, officers, consultants, agents, advisors
and independent contractors of the Company and its subsidiaries to participate
in the Company's growth and success, and to encourage them to remain in the
service of the Company and its subsidiaries and acquire and maintain stock
ownership in the Company. The 1995 Plan includes stock option, stock
appreciation right ("SAR"), stock award (including restricted stock),
performance award, other stock-based award and dividend equivalent right
features. The 1995 Plan is a long-term incentive compensation plan and is
designed to provide a competitive and balanced incentive reward program for
participants. A maximum of 879,000 shares of Common Stock will be available for
issuance under the 1995 Plan. A maximum of 293,000 shares may be granted under
the 1995 Plan as stock awards and performance awards and a maximum of 58,600
shares may be granted under the 1995 Plan to any individual in any one fiscal
year of the Company, except that the Company may make additional one-time grants
to newly hired employees of up to 175,800 shares per each such employee. As of
July 31, 1996, options for 490,025 shares were outstanding under the 1995 Plan.
Stock Option Grants. Each of the Board of Directors and the Compensation
Committee of the Board of Directors (the "Plan Administrator") has the authority
to select individuals who are to receive options under the 1995 Plan and to
specify the terms and conditions of each option so granted (incentive or
nonqualified), the exercise price (which must be at least equal to the fair
market value of the Common Stock on the date of grant with respect to incentive
stock options and at least equal to 85% of the fair market value of the Common
Stock on the date of grant with respect to nonqualified options), the vesting
provisions and the option term. Following the Offering, for purposes of the 1995
Plan, fair market value means the closing price as reported by the Nasdaq
National Market on the date of grant. Unless otherwise provided by the Plan
Administrator, an option granted under the 1995 Plan expires 10 years from the
date of grant or, if earlier, three months after the optionee's termination of
service, other than termination for cause, or one year after the optionee's
death or disability.
Stock Appreciation Rights. The Plan Administrator may grant SARs
separately or in tandem with a stock option award. A SAR is an incentive award
that permits the holder to receive, for each share covered by the SAR, the
amount by which the fair market value of a share of Common Stock on the date of
exercise exceeds the exercise price of such share (the "base price"). A SAR
granted in tandem with a related option will generally have the same terms and
provisions as the related option with respect to exercisability, and the base
price of such SAR will generally be equal to the option price under the related
option. A SAR granted separately will have such terms as the Plan Administrator
may determine, except that, unless otherwise established by the Plan
Administrator, a stand-alone SAR will have a 10-year term and will be subject to
the same provisions relating to termination of employment as options.
Stock Awards. The Plan Administrator is authorized under the 1995 Plan to
issue shares of Common Stock to eligible participants on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine. Such restrictions may be based on continuous service with the
Company or the
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<PAGE> 48
achievement of performance goals relating to sales, gross margin, operating
profits or profit, growth in sales, gross margin, operating profit or profit,
return ratios related to sales, gross margin, operating profit or profit, cash
flow, asset management (including inventory management) or total shareholder
return (together, the "Performance Goals"), where such goals may be stated in
absolute terms or relative to comparison companies, as the Plan Administrator
may determine.
Performance Awards. The Plan Administrator is authorized under the 1995
Plan to grant performance awards that may be denominated in cash, shares of
Common Stock, or any combination thereof, to eligible participants on such terms
and conditions as the Plan Administrator may determine. Performance objectives
may vary among participants and may be based on the Performance Goals, where
such goals may be stated in absolute terms or relative to comparison companies,
as the Plan Administrator may determine. No performance awards denominated in
cash having an aggregate value in excess of $250,000 may be granted to any
individual in any one fiscal year of the Company.
Other Stock-Based Awards. The Plan Administrator may grant other
stock-based awards under the 1995 Plan pursuant to which shares of Common Stock
are or may in the future be acquired, or awards denominated in stock units,
including awards valued using measures other than market value. Such other
stock-based awards may be granted alone or in addition to or in tandem with any
award of any type granted under the 1995 Plan and must be consistent with the
1995 Plan's purpose.
Dividend Equivalent Rights. Any awards under the 1995 Plan may, in the
Plan Administrator's discretion, earn dividend equivalent rights that entitle
the holder to be credited with an amount equal to the cash or stock dividends or
other distributions that would have been paid on the shares of Common Stock
covered by such award had such covered shares been issued and outstanding on
such dividend record date. The Plan Administrator may establish such rules and
procedures governing the crediting of dividend equivalent rights, including the
timing, form of payment and payment contingencies, as it deems appropriate or
necessary.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Employment Agreements. In March 1995, the Company entered into a four-year
employment agreement with Douglas B. Hauff and two-year employment agreements
with each of Steven R. Kingma and David W. Jobe and, in November 1995, a
two-year employment agreement with G. Travis Worth. After expiration of the
initial term, each such employment agreement continues on a quarterly basis
until terminated by either party on 90 days' notice. Pursuant to these
agreements, the Company agreed to pay Messrs. Hauff, Kingma, Jobe and Worth
annual base salaries of $225,000, $95,000, $85,000 and $135,000, respectively,
subject to such annual increases as may be determined by the Company's Board of
Directors. Mr. Hauff and Mr. Kingma are eligible to receive an annual incentive
bonus of up to $60,000 and up to $30,000, respectively, subject to and based on
the achievement by the Company of specified annual operating income objectives.
Mr. Jobe is eligible to receive annual incentive bonuses of (i) up to $22,500,
subject to and based on the achievement by the Company of specified annual
operating income objectives, (ii) up to $20,000, subject to and based on the
achievement by the Company of specified annual sales objectives, and (iii) up to
$15,000, subject to and based on the achievement by the Company of specified
annual sales objectives for its Protective Eyewear division. If the Company does
not achieve specified minimum annual operating, sales or Protective Eyewear
division sales objectives, as applicable, no annual incentive bonus based on the
applicable objective is payable under the employment agreements of such
executives. The agreement with Mr. Hauff also provides that Mr. Hauff will
receive a $300,000 bonus if the Company sells substantially all of its assets or
stock or raises operating capital through an initial public offering of its
securities. This bonus will be paid in connection with the closing of the
Offering. Beginning in 1996, Mr. Worth is entitled to participate in incentive
compensation programs established for management, under which bonus amounts will
range between 25% and 50% of Mr. Worth's base salary. In addition, Messrs.
Kingma, Jobe and Worth were granted incentive stock options to purchase 30,841,
61,682 and 123,365 shares of Common Stock, respectively. The employment
agreements provide the executives with certain fringe benefits relating to
benefit plans, as well as benefits upon termination due to disability. The
employment agreements also provide that if the executive is terminated other
than for cause or resigns for good reason, such executive is entitled to receive
an amount equal to the
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<PAGE> 49
lesser of (i) two years' base salary in the case of Mr. Hauff and six months'
base salary in the case of Messrs. Kingma, Jobe and Worth and (ii) the
executive's base salary payable for the remaining period of the initial term,
less any amounts received under disability insurance policies provided by the
Company or as compensation or benefits from employment during such time,
together with certain other benefits. Each of the employment agreements with
Messrs. Hauff, Kingma and Jobe contains a noncompetition provision effective for
(i) a period equal to the longer of five years from the date of termination of
employment and the end of the employment period if the executive is terminated
for cause or voluntarily resigns or (ii) a period of one year from the date of
termination of employment in the case of any other termination. The employment
agreement with Mr. Worth contains a noncompetition provision effective for (i) a
period of three years from the date of termination of employment if Mr. Worth is
terminated for cause or voluntarily resigns or (ii) a period of six months from
the date of termination of employment in the case of any other termination.
1995 Plan. In the event of certain mergers, consolidations, acquisitions
of property or stock, separations, reorganizations or liquidations of the
Company, outstanding options, SARs and restricted stock under the 1995 Plan will
become fully exercisable, subject to certain exceptions. In addition, the
Compensation Committee of the Board of Directors may take such further action as
it deems necessary or advisable, and fair to participants, with respect to
outstanding awards under the 1995 Plan.
47
<PAGE> 50
CERTAIN TRANSACTIONS
Prior to the Offering, the Company entered into transactions and business
relationships with certain of its officers, directors and shareholders owning 5%
or more of the voting securities of the Company. Future transactions, if any,
between the Company and officers, directors or shareholders owning 5% or more of
the voting securities of the Company will be on terms that are no less favorable
to the Company than those available from independent third parties and will be
subject to the approval of a majority of the disinterested directors.
RECAPITALIZATION TRANSACTION
In March 1995, the Company implemented the Recapitalization, in which (i)
Antone merged into the Company, (ii) the Common Stock was split 13,888.89-for-1,
(iii) approximately 3.5 million shares of Common Stock were redeemed from the
Founder, Dennis L. Burns (who was until then the majority shareholder), for
$10.9 million (paid as described below), and (iv) the Investors purchased
approximately 3.5 million shares, or 60% of the outstanding Common Stock, for
$5.4 million. Of the shares sold to the Investors, 2,930,000 shares were sold to
Trillium for a $4.5 million promissory note; 87,900 shares were sold to Mr.
Hauff, then President and a director of the Company, for $134,687; 58,600 shares
were sold to Mr. Kingma, Vice President, Chief Financial Officer, Secretary and
Treasurer of the Company, for $89,791; 58,600 shares were sold to Mr. Jobe,
Senior Vice President, Sales of the Company, for $89,791; 111,340 shares were
sold to Gary Waterman, a Manager of Workshops L.L.C., an affiliate of Trillium,
for $170,605; and 14,650 shares were sold to Robert Manne, President of Savia
International Inc., an affiliate of Trillium, for $22,448. Trillium made
interest payments of $250,555 to the Company for 1995.
The $10.9 million payment to the Founder was made in part pursuant to a 7%,
$4.5 million promissory note. The Company made interest payments of $250,555 to
the Founder for 1995. The note to the Founder was backed by an irrevocable
standby letter of credit issued on behalf of Trillium; the obligations evidenced
by the Company's note to the Founder and Trillium's note to the Company were
satisfied in full on January 2, 1996. An additional $6.0 million of the
redemption price was paid out of the proceeds of the Recapitalization Loan and
the balance from cash on hand. Trillium guaranteed the payment of all amounts
due under the Recapitalization Loan and pledged its shares of the Company's
Common Stock to secure its guaranty. The Company agreed to pay Trillium an
annual guaranty fee equal to 1% of the outstanding principal amount of the
Recapitalization Loan, and has subsequently paid Trillium fees of $60,000 and
$55,000 for 1995 and 1996, respectively. As of June 30, 1996, $5.5 million was
outstanding under the Recapitalization Loan.
In connection with the Recapitalization, in addition to agreeing to redeem
shares of the Founder's Common Stock, the Company made certain other
distributions to and agreements with the Founder, including:
(a) As severance expenses and settlement of certain claims and obligations
among the Company, the Founder and Supreme Corq Inc. ("Supreme Corq"), which is
majority-owned by the Founder, the Company issued to the Founder, and Conquest
guaranteed, a 10%, $283,100 promissory note (the "Settlement Note") requiring
monthly payments of $10,704 until maturity on March 15, 1998. During the year
ended December 31, 1995, and the six months ended June 30, 1996, the Company
paid $46,152 and $64,226, respectively, for principal and interest on the
Settlement Note. As of June 30, 1996, $205,455 was outstanding under the
Settlement Note.
(b) Supreme Corq agreed to assume (and the Founder agreed to guarantee its
performance of) all lessee obligations under the Company's lease of commercial
space used by Supreme Corq since February 1994 (the "Previously Leased Space").
Supreme Corq, which makes rental payments to the Company equal to the Company's
lease payments, paid the Company, $83,781 and $62,335 in 1995 and the six months
ended June 30, 1996, respectively. The Company received the benefit of $92,000
in lease payments owed for 1994 in the calculation of the Settlement Note.
(c) The Company, Trillium, the Founder, Mr. Hauff and all other
shareholders of the Company entered into a shareholders agreement (which will
automatically terminate upon the effective date of the Offering) relating to the
election of directors, preemptive rights and certain other matters, including
assisting Trillium in effecting the Offering. The Company, Conquest and Antone
agreed, in a Nondisclosure, Noncompetition and
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<PAGE> 51
Indemnity Agreement, to indemnify the Founder for all losses that he incurs from
his involvement with the Company, Conquest and Antone, including losses arising
out of acts or omissions that occur at any time, either before or after the date
of the agreement. The Founder agreed to maintain the confidentiality of the
indemnitor companies' proprietary information and not to compete with any of
them, directly or indirectly, through March 22, 2000.
CONQUEST TRANSACTIONS
The Founder founded both Conquest and the Company, and the two entities
have been closely related, sharing the following officers and directors: the
Founder (who, from Conquest's founding in 1973 until 1995, was the sole or
majority shareholder of both Conquest and the Company); Mr. Hauff (who, since
1992, has been President, Chief Executive Officer, a director and a shareholder
of the Company, as well as President and a director and, since January 1994, a
shareholder of Conquest); Mr. Kingma (who is the Vice President, Chief Financial
Officer, Secretary and Treasurer of both Conquest and the Company); and Messrs.
Anderson and Potts (who, since March 22, 1995, have been directors of both
Conquest and the Company).
Concurrently with the Recapitalization, Conquest, in its own
recapitalization, issued shares of its common stock to the Investors, and
formalized previously undocumented loans from the Founder by issuing a 10%,
$133,400 promissory note to the Founder due March 15, 1998 and guaranteed by the
Company. Conquest made payments to the Founder under this note of $21,747 in
fiscal 1995 and $30,264 in the six months ended June 30, 1996. As of June 30,
1996, $96,813 was outstanding under the note.
Prior to February 1994, Conquest, Antone and the Company shared space in
the Previously Leased Space now occupied by Supreme Corq, and the Company made
all required lease payments. From February 1994 through July 1996, Conquest used
what the Company estimates to be less than 5% of the Company's current leased
premises and certain Company employees performed services for Conquest without
reimbursement to the Company, which together had an estimated cost to the
Company during the year ended December 31, 1995 of $210,000. Reimbursement for
the use of facilities will be made by the purchaser of Conquest's assets for the
period from June 1996 until such use terminates on July 31, 1996.
The Company, which has guaranteed obligations of Conquest from time to
time, guaranteed repayment of a March 1995 10%, $75,000 Trillium loan to
Conquest. As of June 30, 1996, the outstanding balance owed by Conquest to
Trillium was $84,000. In July 1995, as amended in June 1996, the Company
guaranteed Conquest's indebtedness to a commercial bank (the "Bank") and agreed
to subordinate its Conquest indebtedness and present and future indebtedness of
Conquest to the Bank. As of June 17, 1996, the outstanding balance owed by
Conquest to the Bank was $769,785. In January 1996, the Company guaranteed
payment of all of Conquest's obligations under a promissory note in the
principal amount of $129,661 to a former distributor of Conquest. In January
1996, the Company and Conquest reached a severance understanding with a former
officer of both companies. In connection with the severance understanding,
Conquest agreed to make severance payments of $8,333.33 per month for six
months, the Company agreed to make a single payment of $50,000 and the former
officer's right to exercise vested stock options granted by each company was
extended until January 31, 1998.
On June 17, 1996, substantially all the assets of Conquest were sold for a
$598,259 promissory note bearing interest at the prime rate plus 1%, with an
initial principal payment of $168,922 due in July 1996 and maturing in June
1998, to an entity formed by Conquest's former general manager. Pursuant to a
series of advances between the Company and Conquest, the Company, in fiscal
1993, made advances to Conquest that exceeded repayments by Conquest to the
Company by $563,988. Subsequently, the Company made advances to Conquest of
$442,331, $1,007,580 and $44,475 during the fiscal years ended November 30, 1994
and December 31, 1995 and the six months ended June 30, 1996, respectively, and
Conquest made repayments of $612,400 and $562,583 during the fiscal years ended
November 30, 1994 and December 31, 1995, respectively. As of June 30, 1996,
Conquest's outstanding payable to the Company was $953,366. The Company recorded
a provision in the fourth quarter of 1995 of $1.6 million representing the
write-off of the receivable from Conquest and a reserve for other potential
Conquest obligations, including Conquest indebtedness which
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<PAGE> 52
Gargoyles has guaranteed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Company History."
OTHER TRANSACTIONS
From the time it was founded in July 1987 until March 22, 1995, when it was
merged into the Company, Antone, a corporation of which the Founder was the sole
shareholder, assembled the Company's eyewear products. Antone derived revenues
from the Company of $1,115,120, $896,279 and $284,027 during the fiscal years
ended November 30, 1993, November 30, 1994 and December 31, 1995, respectively.
In December 1993, the Company entered into a lease with DB&D Partnership,
of which the Founder and Mr. Hauff were then the sole partners, for the
Company's principal facility in Kent, Washington. In March 1995, Mr. Hauff's
interest in the partnership was transferred to the Founder. The lease, as
amended in March 1995, currently provides for lease payments by the Company of
$18,746 per month (increasing on April 1 of 1997, 1998 and 1999 to $19,496,
$20,276 and $21,087 per month, respectively). The Company paid DB&D Partnership
lease payments of $210,000, $214,725 and $110,313 for the fiscal years ended
November 30, 1994 and December 31, 1995 and the six months ended June 30, 1996,
respectively.
In January 1996, in exchange for a cash payment of $56,000, the Company
issued to Walter F. Walker, a director of the Company, a warrant to purchase
41,020 shares of the Company's Common Stock at an exercise price of $4.26 per
share. The warrant is also convertible by Mr. Walker in certain circumstances
into shares of Common Stock. The warrant was immediately exercisable in full and
expires in December 2005.
In January 1994, the Company, the Founder and Mr. Hauff entered into an
employment agreement pursuant to which the Founder, then the sole shareholder of
the Company, granted Mr. Hauff an initial option to purchase 5% of the Company's
Common Stock for $250,000, subject to a reduction of $40,000 in certain
circumstances, and a further option to purchase an additional 10% of such shares
owned by the Founder. Mr. Hauff exercised the initial option in February 1994.
In connection with the Recapitalization, (i) the 1994 employment agreement was
terminated and the parties thereto entered into an option agreement pursuant to
which the Founder granted Mr. Hauff an option to purchase 586,000 shares of the
Company's Common Stock then owned by the Founder at an exercise price of $0.85
per share, (ii) the Founder sold to the Investors the shares subject to the
option, and (iii) the Founder assigned to the Investors, and the Investors
assumed, the option agreement. In addition, the Investors granted Mr. Hauff an
additional option to purchase 146,500 shares of Common Stock owned by them at an
exercise price of $4.26 per share. Both options were to fully vest on the
closing of the Offering and, if not then exercised, to terminate. On June 28,
1996, the option agreements were amended to cause all options to fully vest on
June 28, 1996, and to terminate, if unexercised, on June 28, 2006.
On June 9, 1988, the Company and Conquest, as plaintiffs, filed a lawsuit
against the U.S. government for infringement of certain patent rights jointly
owned by the Company and Conquest. The Company and Conquest entered into an
agreement with the Founder regarding management of the lawsuit, the Founder's
right to certain proceeds, if any, arising from the claim prior to a final
judgment and the Founder's responsibility for costs and fees for the lawsuit for
periods after March 24, 1995. The agreement provided a value of the rights and
obligations received by the Founder of $100,000. The Company and Conquest
prevailed on liability, and have appealed the court's determination with respect
to the amount of damages. The government has cross appealed as to liability and
damages. The Company incurred legal expenses associated with the damage hearing
totaling $171,000 through the quarter ended March 31, 1995, which the Company
recorded as an expense of the Recapitalization.
In February 1995, Mr. Hauff made a 9.25%, $50,000 loan to the Company which
was repaid in full with interest in March 1995. In January 1996, Mr. Hauff made
a 12%, $50,000 loan to the Company which was repaid in full with interest in
April 1996. In February 1995, Mr. Kingma made a 9.25%, $50,000 loan to the
Company which was repaid in full with interest in March 1995. In January 1996,
Mr. Kingma made a 12%, $40,000 loan to the Company which was repaid in full with
interest in April 1996. In January 1996, Trillium made two loans to the Company,
each in the principal amount of $100,000, with interest accruing at the rate
50
<PAGE> 53
of 12% per annum. The first loan was repaid in full with interest in February
1996 and the second loan was repaid in full with interest in March 1996.
In February 1996, Trillium guaranteed payment of all amounts due under the
Hobie Acquisition Loan in the principal amount of $4.0 million. The Hobie
Acquisition Loan was increased to $5.0 million on June 26, 1996. To secure the
guaranty, Trillium Investors II, L.L.C, an affiliate of Trillium to which
Trillium transferred most of its shares of Common Stock in February 1996,
pledged its shares of Common Stock. In consideration of the guaranty, the
Company paid Trillium a guarantee fee of $50,000 and agreed to indemnify
Trillium for any losses relating to the guaranty. In January 1996, Mr. Hauff
guaranteed the Company's obligation to pay liquidated damages of $100,000 in the
event that the Hobie Acquisition was not consummated; the transaction was
consummated without cost to Mr. Hauff.
In May 1996, the Company, together with Douglas W. Lauer and Timberland,
formed Kindling, a majority-owned subsidiary of the Company. The Company
contributed $1.2 million for its 70% interest in Kindling, while Mr. Lauer owns
a 20% interest in Kindling and Timberland owns the remaining 10% interest. Of
the $1.2 million, $100,000 was paid in cash and $1.1 million by means of a
non-interest-bearing promissory note (the "Kindling Note") payable in
installments of $100,000 each on June 3, July 3, September 3, October 3 and
December 3, 1996 and $600,000 on January 3, 1997. Between January 3, 1997 and
January 1, 2000, Kindling, Mr. Lauer or Timberland may require the Company to
contribute an additional $300,000 to Kindling. From 1999 to 2003, Timberland may
require Kindling to repurchase all of Timberland's 10% interest in Kindling
under certain circumstances. The Company further agreed that Mr. Lauer, and
certain key employees of Kindling, may be granted up to an aggregate of 10%
(2.5% for each year, 1997 to 2000) of Kindling's common stock owned by the
Company upon the achievement of certain operating objectives. Trillium has
agreed to make advances that aggregate up to $400,000 to fund the Company's
installments under the Kindling Note. To date, Trillium has advanced $100,000 in
each of June and July 1996, which are due, with interest at 12% per annum, on
September 30, 1996.
51
<PAGE> 54
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of August 8, 1996, certain information
with respect to the beneficial ownership of the Common Stock by (i) each person
known by the Company to beneficially own more than 5% of the Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers, (iv)
each of the Selling Shareholders, and (v) all of the Company's directors and
executive officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING(1)
------------------------ OFFERED ------------------------
NAME AND ADDRESS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
- ------------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Erik J. Anderson(2)(3).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
Douglas B. Hauff(4)................. 1,109,731 16.8% 0 1,109,731 13.4%
c/o Gargoyles, Inc.
5866 South 194th Street
Kent, Washington 98032
David W. Jobe(5).................... 91,498 1.6% 0 91,498 1.2%
Steven R. Kingma(6)................. 82,824 1.4% 0 82,824 1.1%
Timothy C. Potts(3)(7).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
William D. Ruckelshaus(8)........... 390 * 0 390 *
Paul S. Shipman(8).................. 390 * 0 390 *
Walter F. Walker(9)................. 43,364 * 0 43,364 *
Dennis L. Burns(10)................. 1,465,000 24.9% 591,000 874,000 11.6%
c/o Supreme Corq Inc.
19039 62nd Avenue S.
Kent, Washington 98032
Trillium Corporation(3)(11)......... 3,418,330 58.2% 409,000 3,009,330 39.9%
4350 Cordata Parkway
Bellingham, Washington 98226
All directors and executive officers
as a
group(12) (11 persons)............ 4,118,118 68.2% 409,000 3,709,118 48.1%
</TABLE>
- ---------------
* Less than 1%.
(1) If the Underwriters' over-allotment option is exercised in full, Trillium
Investors II, L.L.C. ("Trillium Investors") and Dennis L. Burns will sell
an additional 101,000 and 141,500 shares, respectively, which will reduce
the number of shares beneficially owned by such persons to 2,908,330 (or
37.8%) and 732,500 (or 9.5%), respectively.
(2) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Anderson is Chief Executive Officer of Trillium. In
addition, Trillium owns an 80.0% interest and Mr. Anderson owns a 10.0%
interest in Trillium Investors. Mr. Anderson is Chairman of the Board of
the Company.
(3) Of these shares, 610,412 are subject to an option granted by Trillium to
Douglas B. Hauff.
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<PAGE> 55
(4) Includes 714,181 shares subject to an option granted to Mr. Hauff by
certain shareholders of the Company, including Steven R. Kingma (with
respect to 12,211 shares), David W. Jobe (with respect to 12,211 shares)
and Trillium (with respect to 610,412 shares). Also includes 146,500 shares
held by the Hauff Family Limited Partnership, of which Mr. Hauff is a
general partner.
(5) Of these shares, 12,211 are subject to an option granted by Mr. Jobe to
Douglas B. Hauff. Also includes 23,130 shares subject to an option
exercisable within 60 days and 5,274 shares held by Russell Goodnow,
Trustee for the Jobe Children's Trust UTA 7/26/96.
(6) Of these shares, 12,211 are subject to an option granted by Mr. Kingma to
Douglas B. Hauff. Also includes 14,456 shares subject to an option
exercisable within 60 days and 2,344 shares held by Mr. Kingma's minor
daughter.
(7) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Potts is Senior Vice President -- Finance of
Trillium. In addition, Trillium owns an 80.0% interest and Mr. Potts owns a
3.4% interest in Trillium Investors. Mr. Potts is a director of the
Company.
(8) Consists of 390 shares subject to an option exercisable within 60 days.
(9) Consists of 41,020 shares subject to a warrant and 2,344 shares subject to
an option, both of which are currently exercisable.
(10) For additional information describing Mr. Burns' historical relationships
with the Company, see "Certain Transactions."
(11) Includes 2,807,918 shares held by Trillium Investors. Trillium owns an
80.0% interest in Trillium Investors and may be deemed the beneficial owner
of such shares as a result of such ownership. In connection with the
Company's credit facility, Trillium and Trillium Investors pledged these
shares in support of Trillium's guarantee of certain of the Company's
obligations under the Hobie Acquisition Loan. In the event of a default by
the Company of its obligations under the Hobie Acquisition Loan and a
failure by Trillium to otherwise satisfy the guaranty, such shares would be
transferred to the bank.
(12) See footnotes (1), (2), (3), (4), (5), (6), (7), (8) and (9). Also includes
5,140 shares subject to an option exercisable within 60 days.
53
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Restated Articles and the Bylaws
of the Company, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
On August 8, 1996, there were 5,875,637 shares of Common Stock outstanding,
held of record by 23 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of shareholders. There are no
cumulative voting rights for the election of directors. Holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor, subject to preferences
that may be applicable to any outstanding Preferred Stock. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of the Offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
powers, designations, rights, preferences and restrictions thereof, including
dividend rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's shareholders. Upon the closing of the
Offering, no shares of Preferred Stock will be outstanding. The issuance of
Preferred Stock in certain circumstances may delay, deter or prevent a change in
control of the Company, may discourage bids for the Company's Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of, the Common
Stock. The Company currently has no plans to issue any Preferred Stock.
STOCK DIVIDEND; AMENDMENTS TO RESTATED ARTICLES OF INCORPORATION
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of Common Stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Offering. The payment of such dividend is subject
to approval by the Company's shareholders of an amendment to the Restated
Articles to increase the number of authorized shares. The information in this
Prospectus assumes that such dividend has been paid and such amendment has been
made.
WARRANT
On August 8, 1996, there was one warrant outstanding to purchase 41,020
shares of Common Stock at an exercise price of $4.26 per share.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. In addition, Chapter
23B.19 of the Washington Business Corporation Act prohibits a corporation, with
certain exceptions, from engaging in certain significant business transactions
with an "Acquiring Entity" (defined as a person who acquires 10% or more of the
corporation's voting securities without the prior approval of the corporation's
board of directors) for a period of five years after such acquisition. The
prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, the Acquiring Entity,
or allowing the Acquiring Entity to receive
54
<PAGE> 57
any disproportionate benefit as a shareholder. An Acquiring Entity is further
prohibited from engaging in significant business transactions with the target
corporation unless the per share consideration paid to holders of outstanding
shares of Common Stock and other classes of stock of the target corporation meet
certain minimum criteria. These provisions may have the effect of delaying,
deterring or preventing a change in control of the Company.
CERTAIN PROVISIONS IN RESTATED ARTICLES
Effective with the first annual meeting of shareholders following the
Offering, the Restated Articles provide for the division of the Company's Board
of Directors into three classes, as nearly equal in number as possible, each for
a three-year term, with one class being elected each year by the Company's
shareholders. See "Management -- Directors, Executive Officers and Key
Employees." Directors may be removed only for cause and only by a vote of not
less than two-thirds of the shares of the Company's capital stock entitled to
vote on an election of the director whose removal is sought.
The Restated Articles require that certain business combinations (including
a merger, share exchange or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of a substantial part of the Company's assets) be
approved by the holders of not less than two-thirds of the outstanding shares,
unless such business combination shall have been approved by a majority of
Continuing Directors (defined as those individuals who were members of the Board
of Directors on July 1, 1996 or were elected thereafter on the recommendation of
a majority of the Continuing Directors), in which case the affirmative vote
required shall be a majority of the outstanding shares.
Under the Restated Articles, the shareholders may call a special meeting
only upon the request of holders of at least 25% of the outstanding shares. The
Restated Articles also provide that changes to certain provisions of the
Articles of Incorporation, including those regarding amendment of certain
provisions of the Bylaws or Restated Articles, the classified Board of
Directors, special voting provisions for business combinations and special
meetings of shareholders, must be approved by the holders of not less than
two-thirds of the outstanding shares.
It is possible that the provisions discussed above may delay, deter or
prevent a change in control of the Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Restated Articles include a provision permitted by Washington law that
limits the liability of the Company's directors. Under the provision, no
director shall be personally liable to the Company or its shareholders for
monetary damages for conduct as a director, excluding, however, liability for
acts or omissions involving intentional misconduct or knowing violations of law,
illegal distributions or transactions from which the director receives benefits
to which the director is not legally entitled. In addition, Washington law
provides for broad indemnification by the Company of its officers and directors.
The Company's Bylaws and indemnification agreements entered into between the
Company and its directors implement this indemnification to the fullest extent
permitted by law. Insofar as the indemnity for liabilities arising under the
Securities Act may be permitted to directors or officers of the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
55
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,542,304 shares of
Common Stock outstanding (7,699,804 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of outstanding options under
the Company's benefit plan. The shares sold in the Offering will be freely
tradable without restriction or limitation under the Securities Act, except for
any such shares held by "affiliates" of the Company, as such term is defined
under Rule 144 of the Securities Act, which shares will be subject to the resale
limitations under Rule 144. The remaining 4,875,637 shares are "restricted
securities" within the meaning of Rule 144 and were issued and sold by the
Company in private transactions and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The Company, all executive officers, directors
and shareholders of the Company have agreed with the Representatives not to
sell, directly or indirectly, any shares owned by them for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc. Upon the expiration of this 180-day lock-up period (or earlier upon
the consent of Smith Barney Inc.), approximately 1,750,000 of these restricted
shares (plus shares issuable upon exercise of then-vested outstanding options
and warrants) will become eligible for sale subject to the restrictions of Rule
144, none of which will be freely tradable in reliance on Rule 144(k). In
addition, approximately an additional 715,000 shares are subject to an option
granted by certain shareholders of the Company to Douglas B. Hauff and have been
placed in escrow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General." If this escrow arrangement were
to terminate for any reason, approximately 600,000 of these shares would become
eligible for sale subject to the restrictions of Rule 144 beginning in March
1997. If Mr. Hauff should exercise this option, approximately 80,000 of such
shares would be eligible for sale beginning in March 1997 subject to the
restrictions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including an affiliate of the Company, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then outstanding shares of Common Stock (approximately 75,400
shares) and the average weekly trading volume in the Common Stock during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, affiliates of the
Company must comply with the restrictions and requirements of Rule 144, other
than the two-year holding period requirement, in order to sell shares of Common
Stock. As defined in Rule 144, an "affiliate" of an issuer is a person who
directly or indirectly through the use of one or more intermediaries controls,
or is controlled by, or is under common control with, such issuer. Under Rule
144(k), a holder of "restricted securities" who is not deemed an affiliate of
the issuer and who has beneficially owned shares for at least three years would
be entitled to sell shares under Rule 144(k) without regard to the limitations
described above.
The Company intends to file a registration statement under the Securities
Act following the date of this Prospectus to register the future issuance of up
to 879,000 shares of Common Stock under the 1995 Plan. Shares issued under the
1995 Plan after the effective date of such registration statement will be freely
tradable in the open market, subject to the lock-up agreements with the
Representatives described above and, in the case of sales by affiliates, to
certain requirements of Rule 144. As of September 1, 1996, options to purchase
approximately 107,000 shares of Common Stock will be vested, of which
approximately 43,500 such shares will be subject to the 180-day lock-up period
described above. See "Management -- Benefit Plan." In addition, a warrant to
purchase 41,020 shares of Common Stock is currently outstanding and subject to
the lock-up agreement described above.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the prospect of such sales, could adversely affect the market price of the
Common Stock.
56
<PAGE> 59
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed to
sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
- ------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc...............................................................
Robertson, Stephens & Company LLC..............................................
---------
Total................................................................ 2,666,667
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Robertson, Stephens &
Company LLC are acting as Representatives, propose to offer part of the shares
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and part of the shares to certain dealers at a
price that represents a concession not in excess of $ per share under
the initial public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have advised the Company that
the Underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 400,000 additional shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, minus the underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name above bears to the total number of shares listed above.
The Company, as well as its executive officers and directors, the Selling
Shareholders and all other shareholders of the Company have agreed that, for a
period of 180 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, other than in a
transaction in which the transferee pays no value and agrees to be subject to
the same restrictions on transfer.
Prior to the Offering, there has not been a public market for the Common
Stock. Consequently, the initial public offering price for the shares included
in the Offering will be determined by negotiations among the Company, the
Selling Shareholders and the Representatives. Among the factors considered in
determining such price will be the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the Company's
past and present revenues and earnings, the prospects for growth of the
Company's revenues and earnings, the current state of the U.S. economy and the
current level of economic activity in the industry
57
<PAGE> 60
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
valuations of publicly traded companies which are comparable to the Company.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed on for the Company and one of the
Selling Shareholders by Perkins Coie, Seattle, Washington. Certain legal matters
will be passed on for the Underwriters by Heller, Ehrman, White & McAuliffe,
Seattle, Washington. Certain legal matters will be passed on for one of the
Selling Shareholders by Bogle & Gates P.L.L.C.
EXPERTS
The consolidated financial statements of Gargoyles, Inc. at November 30,
1994 and December 31, 1995 and for each of the years ended November 30, 1993,
November 30, 1994 and December 31, 1995, and the one month ended December 31,
1994 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
Effective July 13, 1995, the Company's Board of Directors retained Ernst &
Young LLP as the independent accountants for the Company. There were no
disagreements with McClinton, Workman & Associates, P.S., the Company's former
independent accountants, regarding accounting principles or practices, financial
statement disclosures, or auditing scope or procedures. The former accountants'
report for the fiscal year ended November 30, 1994, which report is not included
herein, did not contain an adverse opinion or a disclaimer of an opinion or
qualifications as to uncertainty, audit scope or accounting principles. Prior to
retaining Ernst & Young LLP, the Company had not consulted with Ernst & Young
LLP regarding the application of accounting principles, the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any event that was either a reportable event or the subject of a
disagreement.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which constitutes part of the
Registration Statement, omits certain information contained in the Registration
Statement and the exhibits thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. The
Registration Statement, including the exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may
be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. In addition, the
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors and may furnish its shareholders with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
58
<PAGE> 61
GARGOYLES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Gargoyles, Inc. Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Shareholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
H.S.I. d/b/a Hobie Sunglasses
Report of Ernst & Young LLP, Independent Auditors................................... F-17
Balance Sheets...................................................................... F-18
Statements of Operations and Retained Earnings...................................... F-19
Statements of Cash Flows............................................................ F-20
Notes to Financial Statements....................................................... F-21
</TABLE>
F-1
<PAGE> 62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying consolidated balance sheets of Gargoyles,
Inc. as of November 30, 1994 and December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended November 30, 1993 and 1994, the one month ended December 31, 1994, and the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gargoyles, Inc.
at November 30, 1994 and December 31, 1995, and the related consolidated results
of its operations and its cash flows for the years ended November 30, 1993 and
1994, the one month ended December 31, 1994, and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996, except for the second
paragraph of Note 13,
as to which the date is , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock dividend described in Note 13 to the consolidated financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
August 14, 1996
F-2
<PAGE> 63
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
NOVEMBER 30, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,282 $ 900 $ 23,380
Trade receivables, less allowances for doubtful
accounts of $10,000, $10,355 and $78,833..... 2,231,539 2,514,489 7,770,473
Inventories..................................... 2,613,084 5,473,692 6,448,505
Trade credits................................... 305,015 497,587 491,228
Other current assets and prepaid expenses....... 249,420 732,984 1,594,780
------------ ------------- -------------
Total current assets.............................. 5,401,340 9,219,652 16,328,366
Receivable from affiliate......................... 418,845 -- --
Property and equipment, net....................... 853,225 1,900,603 2,165,626
Intangibles....................................... -- -- 3,108,124
Other assets...................................... -- 145,979 216,251
------------ ------------- -------------
Total assets...................................... $6,673,410 $ 11,266,234 $ 21,818,367
============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank under revolving line of
credit....................................... $2,067,841 $ 5,412,916 $ 7,536,058
Note payable to bank............................ -- -- 5,000,000
Accounts payable................................ 2,908,204 3,572,739 3,299,104
Accrued expenses and other current
liabilities.................................. 432,255 1,577,048 4,092,761
Current maturities of long-term debt............ 138,900 1,349,333 1,412,717
------------ ------------- -------------
Total current liabilities......................... 5,547,200 11,912,036 21,340,640
------------ ------------- -------------
Deferred license income........................... -- 540,000 450,000
------------ ------------- -------------
Long-term debt.................................... 350,593 6,017,812 5,828,096
------------ ------------- -------------
Minority interest................................. -- -- 360,000
------------ ------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, authorized
shares -- 10,000,000, none issued............ -- -- --
Common stock, no par value, authorized shares --
40,000,000, issued and
outstanding -- 5,860,000, 5,860,003 and
5,875,637 for 1994, 1995 and June 30, 1996,
respectively................................. 572 5,788,070 9,302,250
Repurchased shares.............................. -- (10,895,500) (10,895,500)
Retained earnings (deficit)..................... 775,045 (1,946,184) (4,567,119)
Deferred compensation........................... -- (150,000) --
------------ ------------- -------------
Total shareholders' equity........................ 775,617 (7,203,614) (6,160,369)
------------ ------------- -------------
Total liabilities and shareholders' equity........ $6,673,410 $ 11,266,234 $ 21,818,367
============ ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 64
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH SIX MONTHS ENDED
NOVEMBER 30, ENDED YEAR ENDED JUNE 30,
------------------------ DECEMBER 31, DECEMBER 31, ------------------------
1993 1994 1994 1995 1995 1996
---------- ----------- ----------------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $8,242,051 $11,082,986 $ 574,831 $17,895,968 $9,123,832 $17,626,816
Cost of sales................ 3,243,525 4,265,002 237,785 7,016,815 3,473,734 7,386,185
---------- ----------- --------- ----------- ---------- ----------
Gross profit................. 4,998,526 6,817,984 337,046 10,879,153 5,650,098 10,240,631
License income............... -- -- -- 480,000 290,000 293,609
---------- ----------- --------- ----------- ---------- ----------
4,998,526 6,817,984 337,046 11,359,153 5,940,098 10,534,240
---------- ----------- --------- ----------- ---------- ----------
Operating expenses:
Sales and marketing........ 2,210,271 3,041,008 208,849 5,934,213 2,800,660 4,985,350
General and
administrative.......... 1,452,815 2,558,002 235,639 3,029,638 1,334,906 2,077,552
Shipping and warehousing... 436,329 607,058 42,619 1,030,070 428,477 1,070,638
Research and development... 214,676 127,226 6,639 305,592 128,442 332,658
Stock compensation......... -- -- -- 250,000 155,000 3,528,140
---------- ----------- --------- ----------- ---------- ----------
Total operating expenses..... 4,314,091 6,333,294 493,746 10,549,513 4,847,485 11,994,338
---------- ----------- --------- ----------- ---------- ----------
Income (loss) from
operations................. 684,435 484,690 (156,700) 809,640 1,092,613 (1,460,098)
---------- ----------- --------- ----------- ---------- ----------
Other income (expense):
Interest expense, net...... (55,140) (175,486) (20,975) (1,042,523) (390,930) (1,161,119)
Recapitalization
expenses................ -- -- -- (573,710) (573,710) --
Provision for loss on
affiliate............... -- -- -- (1,597,051) -- --
Other...................... 2,423 158 1,194 6,829 5,385 282
---------- ----------- --------- ----------- ---------- ----------
Total other income
(expense).................. (52,717) (175,328) (19,781) (3,206,455) (959,255) (1,160,837)
---------- ----------- --------- ----------- ---------- ----------
Income (loss) before income
taxes...................... 631,718 309,362 (176,481) (2,396,815) 133,358 (2,620,935)
Income tax provision
(benefit).................. 40,000 10,500 (65,000) (100,000) 5,000 --
---------- ----------- --------- ----------- ---------- ----------
Net income (loss)............ $ 591,718 $ 298,862 $ (111,481) $(2,296,815) $ 128,358 $(2,620,935)
========== =========== ========= =========== ========== ==========
Pro forma data (unaudited):
Historical income (loss)
before income tax
provision (benefit)..... $ 631,718 $ 309,362 $ (176,481) $(2,396,815) $ 133,358 $(2,620,935)
Pro forma income tax
provision (benefit)..... 216,400 130,800 (59,300) (54,300) 50,700 --
---------- ----------- --------- ----------- ---------- ----------
Pro forma net income
(loss).................. $ 415,318 $ 178,562 $ (117,181) $(2,342,515) $ 82,658 $(2,620,935)
========== =========== ========= =========== ========== ==========
Pro forma net income (loss)
per share............... $ 0.07 $ 0.03 $ (0.02) $ (0.38) $ 0.01 $ (0.43)
========== =========== ========= =========== ========== ==========
Weighted average common
shares used in the
calculation of pro forma
net income (loss) per
share................... 6,138,260 6,138,260 6,138,260 6,138,260 6,138,260 6,141,836
========== =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 65
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------------- REPURCHASED EARNINGS DEFERRED
SHARES AMOUNT STOCK (DEFICIT) COMPENSATION TOTAL
---------- ---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1992...... 5,860,000 $ 572 $ -- $ 1,095,965 $ -- $ 1,096,537
Net income for the year ended
November 30, 1993............. -- -- -- 591,718 -- 591,718
Distributions to former majority
shareholder................... -- -- -- (587,000) -- (587,000)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1993...... 5,860,000 572 0 1,100,683 0 1,101,255
Net income for the year ended
November 30, 1994............. -- -- -- 298,862 -- 298,862
Distributions to former majority
shareholder................... -- -- -- (624,500) -- (624,500)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1994...... 5,860,000 572 0 775,045 0 775,617
Net loss for the month ended
December 31, 1994............. -- -- -- (111,481) -- (111,481)
Distributions to former majority
shareholder................... -- -- -- (51,786) -- (51,786)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1994...... 5,860,000 572 0 611,778 0 612,350
Stock redemption from former
majority shareholder.......... (3,516,000) -- (10,895,500) -- -- (10,895,500)
Stock issued for cash........... 3,516,003 5,387,498 -- -- 5,387,498
Deferred compensation related to
amendment of stock options.... -- 400,000 -- -- (400,000 ) 0
Stock compensation.............. -- -- -- -- 250,000 250,000
Distributions to former majority
shareholder................... -- -- -- (261,147) -- (261,147)
Net loss for the year ended
December 31, 1995............. -- -- -- (2,296,815) -- (2,296,815)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1995...... 5,860,003 5,788,070 (10,895,500) (1,946,184) (150,000 ) (7,203,614)
Sale of warrant (unaudited)..... -- 56,000 -- -- -- 56,000
Stock issued in connection with
acquisition (unaudited)....... 15,634 80,040 -- -- -- 80,040
Deferred compensation related to
amendment of stock options
(unaudited)................... -- 3,378,140 -- -- (3,378,140 ) --
Stock compensation
(unaudited)................... -- -- -- -- 3,528,140 3,528,140
Net loss for the six months
ended June 30, 1996
(unaudited)................... -- -- -- (2,620,935) -- (2,620,935)
----------- ---------- ------------ ----------- --------- ------------
Balance at June 30, 1996
(unaudited)..................... 5,875,637 $9,302,250 $(10,895,500) $(4,567,119) $ -- $ (6,160,369)
=========== ========== ============ =========== ========= ============
Authorized shares................. 40,000,000
</TABLE>
See accompanying notes.
F-5
<PAGE> 66
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH SIX MONTHS ENDED
NOVEMBER 30, ENDED YEAR ENDED JUNE 30,
---------------------- DECEMBER 31, DECEMBER 31, --------------------------
1993 1994 1994 1995 1995 1996
--------- ---------- ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ 591,718 $ 298,862 $ (111,481) $ (2,296,815) $ 128,358 $(2,620,935)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Amortization......................... -- -- -- -- -- 57,346
Depreciation......................... 49,876 127,827 7,266 234,054 76,335 208,306
Stock compensation................... -- -- -- 250,000 155,000 3,528,140
Deferred license income.............. -- -- -- 540,000 630,000 (90,000)
Recapitalization expenses included in
note payable to shareholder........ -- -- -- 283,100 -- --
Changes in assets and liabilities net
of effects from purchase of Hobie:
Accounts receivable................ (525,180) (795,403) 163,486 (446,436) (1,732,919) (4,961,364)
Inventories........................ (328,541) (1,288,041) (10,219) (2,850,389) (326,075) 123,531
Other current assets and other
assets........................... (73,207) (458,655) (41,364) (780,751) (934,370) (773,193)
Accounts payable, accrued expenses
and other current liabilities.... 592,831 1,728,069 (469,565) 2,278,893 445,949 1,871,189
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities................. 307,497 (387,341) (461,877) (2,788,344) (1,557,722) (2,656,980)
--------- ---------- --------- ------------ ------------ ------------
INVESTING ACTIVITIES
Acquisition of property and
equipment............................ (157,198) (659,020) (19,097) (1,269,601) (424,634) (398,450)
Purchase of Hobie...................... -- -- -- -- -- (3,974,900)
--------- ---------- --------- ------------ ------------ ------------
Net cash used in investing
activities........................... (157,198) (659,020) (19,097) (1,269,601) (424,634) (4,373,350)
--------- ---------- --------- ------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from revolving line of
credit............................... 664,534 1,256,801 598,631 2,746,444 1,091,107 2,123,142
Proceeds from issuance of note payable
to bank and long-term debt........... 162,876 371,339 -- 7,000,000 6,610,000 5,260,000
Principal payments on long-term debt... (71,541) (133,036) (15,074) (390,374) (80,390) (386,332)
Payments for stock repurchase.......... -- -- -- (6,405,920) (6,405,920) --
Proceeds from stock issuance........... -- -- -- 897,918 897,918 --
Proceeds from warrant issuance......... -- -- -- -- -- 56,000
Distributions to shareholder........... (587,000) (624,500) (51,786) (261,147) (261,147) --
Net (payments) proceeds on affiliate
accounts............................. (563,988) 170,069 (45,049) 463,894 123,548 --
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities................. (395,119) 1,040,673 486,722 4,050,815 1,975,116 7,052,810
--------- ---------- --------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents..................... (244,820) (5,688) 5,748 (7,130) (7,240) 22,480
Cash and cash equivalents, beginning of
period............................... 252,790 7,970 2,282 8,030 8,030 900
--------- ---------- --------- ------------ ------------ ------------
Cash and cash equivalents, end of
period............................... $ 7,970 $ 2,282 $ 8,030 $ 900 $ 790 $ 23,380
========= ========== ========= ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 67
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry
Gargoyles, Inc. ("Gargoyles" or the "Company") designs, manufactures and
markets a broad line of performance and outdoor lifestyle-oriented sunglasses.
The Company's products are mainly sold through sunglass specialty, sporting
goods, department and optical stores. The Company subcontracts certain of its
manufacturing processes. Management believes there are adequate alternative
sources for these services should an existing subcontractor be unable to
perform. Its headquarters and main warehouse are located in Kent, Washington.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation. Minority interest represents the 30% ownership
held by outside investors in the kindling company ("Kindling").
Fiscal Year
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year. Accordingly, results of operations for the one
month ended December 31, 1994 are separately presented herein.
Interim Financial Information
The financial information at June 30, 1996 and for the six months ended
June 30, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. The Company's net sales are subject to
seasonal variations. Accordingly, operating results for the June 30, 1996 period
are not necessarily indicative of the results that may be expected for the
entire year.
Recapitalization
In connection with a change in control of the Company, on March 22, 1995,
the Company sold 3,516,003 shares to a group of new investors, including certain
members of the Company's senior management. Proceeds from the sale were
$5,387,498. On the same date, 3,516,000 previously issued and outstanding shares
were repurchased by the Company from the former majority shareholder for
$10,895,500. The redemption was funded with the proceeds from the stock issuance
and bank financing of $6,000,000. Proceeds in excess of redemption requirements
provided additional working capital. In connection with this recapitalization,
the Company recorded a charge of $573,710 relating primarily to severance, legal
and other costs.
In connection with the recapitalization of Gargoyles, Antone Manufacturing,
Inc. ("Antone") was merged into Gargoyles. Antone was wholly owned by the former
majority owner of Gargoyles. Antone provided assembly operations for Gargoyles.
The merger has been accounted for as a pooling of interests due to common
ownership, and financial statements for all periods prior to the
recapitalization have been restated to reflect the pooling.
F-7
<PAGE> 68
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer. The
Company records sales net of volume and cash discounts.
Warranties
The Company's sunglasses are covered by a warranty against defects in
material and workmanship. The Company has established a reserve for these
anticipated future warranty costs which is periodically adjusted to reflect
actual experience.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease, if less than the
estimated useful life.
Intangibles
Intangible assets are carried on the basis of cost and are amortized on the
straight-line method over their estimated useful lives, ranging from 2 to 27
years. Goodwill represents the cost of acquired businesses in excess of amounts
assigned to tangible and intangible assets at the date of acquisition.
At June 30, 1996, intangibles consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C> <C>
Goodwill............................................. $2,525,430 27 years
Licensing and management agreements.................. 360,000 8 years
Noncompete agreements................................ 280,040 2 years
----------
3,165,470
Less accumulated amortization........................ 57,346
----------
$3,108,124
==========
</TABLE>
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$264,330, $407,422, $258,419 and $276,922 in advertising costs during the years
ended November 30, 1993 and 1994 and December 31, 1995 and the six months ended
June 30, 1996, respectively.
F-8
<PAGE> 69
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
Prior to the recapitalization in March 1995, Antone had elected to be taxed
as an S corporation under the provisions of the Internal Revenue Code.
Accordingly, Antone's taxable income included in the financial statements,
through the date of the recapitalization, is treated as if it were distributed
to the shareholder, who was responsible for payment of taxes thereon.
Pro Forma Data
Pro forma income tax provision (benefit) and net income (loss) data is
included to present the results of operations as if Antone's earnings had been
taxed as a C corporation rather than an S corporation. The difference between
the pro forma income tax rate and the federal statutory rate of 34% relates
primarily to net operating loss carryforwards and other deferred tax assets
which have been reserved due to the uncertainty of the Company's ability to
recover such amounts.
Pro forma net income (loss) per share is computed based on the weighted
average number of common and common equivalent shares outstanding using the
treasury stock method. In accordance with the Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the filing of the Company's proposed initial public offering
have been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method and an assumed initial public
offering price of $15 per share.
License Agreement
During the first quarter of 1995, the Company entered into an agreement to
license the name "Gargoyles" for use on certain nonsunglass products, whereby
the Company, as licensor, receives quarterly cash payments based on a portion of
the licensee's income from the sale of certain products.
The Company received a payment of $1,000,000 at the inception of the
agreement. After deducting expenses associated with the license agreement, the
$720,000 balance was recorded as deferred license income and is being amortized
over the four-year estimated term of the license agreement.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. Net sales to the Company's largest customer represented 34%,
34%, 32% and 37% of net sales for the years ended November 30, 1993 and 1994 and
December 31, 1995 and the six months ended June 30, 1996, respectively. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains an allowance for doubtful accounts
at a level which management believes is sufficient to cover potential credit
losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995
and June 30, 1996.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation
F-9
<PAGE> 70
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense is measured using either the intrinsic value method, as prescribed by
Accounting Principles Board Opinion No. 25, or the fair value method described
in Statement No. 123. Companies choosing the intrinsic value method will be
required to disclose the pro forma impact of the fair value method on net income
and earnings per share. The Company implemented Statement No. 123 in 1996 using
the intrinsic value method. Accordingly, the adoption of Statement No. 123 had
no impact on the Company's financial statements.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121 regarding accounting for
the impairment of long-lived assets. The Company adopted Statement No. 121 in
1995. The effect of the adoption had no material impact on the Company's
financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Raw materials................................. $1,327,453 $4,804,323 $4,729,319
Finished goods................................ 1,285,631 669,369 1,719,186
------------ ------------ ------------
$2,613,084 $5,473,692 $6,448,505
============ ============ ============
</TABLE>
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
Other current assets and prepaid expenses consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Income tax refund receivable.................. $ -- $191,742 $ 191,742
Receivable on discontinued distribution
agreement................................... -- 126,913 --
Other receivables............................. 119,454 188,640 293,118
Prepaid expenses.............................. 73,592 117,332 840,280
Deposits...................................... -- 56,466 81,716
Other......................................... 56,374 51,891 187,924
----------- ---------- - ------------
$249,420 $732,984 $1,594,780
=========== =========== ============
</TABLE>
F-10
<PAGE> 71
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Molds and production equipment................ $ 442,023 $1,037,936 $1,343,082
Office furniture and equipment................ 549,317 1,024,908 1,235,711
Exhibit and marketing equipment............... 118,017 308,418 333,540
Transportation equipment...................... 76,537 24,718 24,718
Leasehold improvements........................ 143,092 179,570 210,575
---------- ---------- ----------
1,328,986 2,575,550 3,147,626
Less accumulated depreciation and
amortization................................ (475,761) (674,947) (982,000)
---------- ---------- ----------
Furniture and equipment, net.................. $ 853,225 $1,900,603 $2,165,626
========== ========== ==========
</TABLE>
5. DEBT
Gargoyles has a revolving line of credit with a bank which matures on March
22, 1997. At December 31, 1995, the Company could borrow up to the lesser of 80%
of eligible accounts receivable and 50% of eligible inventories or $6,000,000.
Effective February 13, 1996, the limit on borrowings under this line of credit
was increased to $10,000,000. Borrowings under the line of credit bear interest
at the bank's prime rate plus 1% per annum (9.50% at December 31, 1995), payable
monthly. Amounts borrowed under the line of credit are secured by all tangible
and intangible personal property of the Company.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Note payable to bank, bearing interest at prime
rate plus 1.5% (10% at December 31, 1995),
interest payable monthly, principal payable
quarterly at $230,769 through March 2002...... $ -- $ 5,769,231 $ 5,538,462
Notes payable to bank, bearing interest at prime
rate plus 1.25%, interest payable monthly,
principal payable quarterly through 2000,
secured by equipment with a net book value of
approximately $1,125,000 at December 31,
1995.......................................... -- 996,750 1,196,750
Note payable to shareholder, bearing interest at
10%, payable in $10,704 monthly installments
of principal and interest through March
1998.......................................... -- 257,836 205,455
Other notes payable at various interest rates,
secured by equipment and other assets, with
maturities through 2000....................... 489,493 343,328 300,146
--------- ----------- -----------
Total long-term debt............................ 489,493 7,367,145 7,240,813
Less current maturities......................... (138,900) (1,349,333) (1,412,717)
--------- ----------- -----------
Long-term debt, less current maturities......... $ 350,593 $ 6,017,812 $ 5,828,096
========= =========== ===========
</TABLE>
F-11
<PAGE> 72
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual principal payments required on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------------------------
<S> <C>
1996........................... $1,349,333
1997........................... 1,372,725
1998........................... 1,248,920
1999........................... 1,188,321
2000........................... 1,053,995
Thereafter..................... 1,153,851
----------
$7,367,145
==========
</TABLE>
The note payable to bank of $5,769,231 at December 31, 1995 was incurred in
connection with the recapitalization of Gargoyles in March 1995 and is
guaranteed by the majority shareholder. Included in other assets are capitalized
loan fees with a net unamortized balance of $133,935 at December 31, 1995, which
is being amortized over the life of the related loan.
In connection with the recapitalization of Gargoyles in March 1995, a
redemption note payable was incurred in the amount of $4,489,580 payable to the
previous majority owner. This note required interest-only payments at a rate of
7% per annum, payable monthly through January 2, 1996. The Company had an
offsetting note receivable from the current majority shareholder in the same
principal amount with the same interest terms. The note payable and note
receivable, which were secured by a letter of credit, and associated interest
have been offset for financial reporting purposes. On January 2, 1996, the
obligations evidenced by the note receivable and the note payable were satisfied
in full.
The credit agreements require, among other things, that the Company
maintain a minimum tangible net worth and working capital and meet certain
ratios relating to debt coverage, and place restrictions on the payment of
dividends. At December 31, 1995, the Company was not in compliance with certain
of the covenants, for which the bank has provided a waiver. In June 1996,
certain covenants were amended, and the Company was in compliance with all
covenants at June 30, 1996.
In connection with the acquisition, Gargoyles borrowed $4,000,000 from an
existing lender. The loan bears interest at the bank's prime rate plus 3% per
annum (11.25% at June 30, 1996), payable monthly. A principal payment of
$700,000 is due on September 30, 1996, with the balance due on December 31,
1996. If this loan is not repaid by December 31, 1996, the Company must pay an
additional loan fee of $5.0 million or issue a warrant to purchase that number
of shares of common stock that would constitute 25% of the Company's common
stock on a fully diluted basis at a purchase price of $0.01 per share. Such
warrant would be exercisable any time after March 31, 1997 through June 30,
1997. The new agreement contains interest requirements and covenants similar to
those in existing debt agreements. The net proceeds from this acquisition loan
in excess of the stock purchase price were used to provide working capital for
Gargoyles and its subsidiaries.
In February 1995, two of the Company's officers made loans to the Company
totalling $100,000 and bearing interest at an average rate of 9.25%. The loans
were repaid in full with interest in March 1995.
In January 1996, the Company borrowed $290,000 at 12% per annum from
officers and shareholders. The loans were repaid in full with interest as of
April 1996.
The Company made interest payments totaling $46,975, $164,802, $1,014,565
and $901,939 during the years ended November 30, 1993 and 1994 and December 31,
1995 and the six months ended June 30, 1996, respectively.
F-12
<PAGE> 73
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The difference between the income tax provision (benefit), all of which is
current, based upon the federal statutory income tax rate and the income tax
provision (benefit) recorded in the financial statements is attributable to the
following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, YEAR ENDED
--------------------- DECEMBER 31,
1993 1994 1995
--------- --------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate (34%)....................................... $ 215,000 $ 105,000 $ (815,000)
Change in deferred tax valuation allowance......... -- 19,500 737,900
Antone S corporation earnings...................... (176,400) (120,300) (45,700)
Other.............................................. 1,400 6,300 22,800
--------- --------- ---------
$ 40,000 $ 10,500 $ (100,000)
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................. $ (28,800) $ (54,300)
--------- ---------
Deferred tax assets:
Deferred license income.................................... -- 251,000
Accrued liabilities of affiliate........................... -- 225,100
Deferred compensation...................................... 151,300
---
Net operating loss carryforwards........................... -- 112,200
Sales return allowance..................................... 47,600 71,400
Inventory valuation allowance.............................. 34,000 34,000
Warranty reserves.......................................... 34,000 34,000
Accrued vacation........................................... 16,000 16,000
--------- ---------
Total deferred tax assets.................................... 131,600 895,000
--------- ---------
Net deferred taxes........................................... $ 102,800 $ 840,700
========= =========
Valuation allowance.......................................... $ (102,800) $ (840,700)
========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $300,000. These carryforwards expire in 2010.
The Company made income tax payments totaling $44,120 and $65,122 during
the years ended November 30, 1993 and 1994, respectively. No income tax payments
were made during the year ended December 31, 1995 and the six months ended June
30, 1996.
7. COMMITMENTS AND CONTINGENCIES
Since 1994, the Company has been leasing its primary operating and office
premises under a noncancelable operating lease, expiring in March 2000. Terms of
this lease include 4% annual rental payment increases. The owner of these
premises is a current shareholder and the former majority owner of Gargoyles.
Rent expense under this lease totaled $210,000 and $214,725 for the years ended
November 30, 1994 and December 31, 1995, respectively.
F-13
<PAGE> 74
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Late in 1995, the Company leased additional office space under a
noncancelable operating lease, expiring in October 1997. Terms of this lease
include monthly rental payments of $3,066.
Minimum future lease payments under noncancelable operating leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................... $ 259,585
1997........................................... 262,362
1998........................................... 240,972
1999........................................... 250,611
2000........................................... 63,261
-----------
$1,076,791
===========
</TABLE>
The Company enters into endorsement contracts from time to time with
certain athletes and others to promote the Company's products. Minimum annual
payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................ $178,500
1997............................................ 138,500
1998............................................ 113,500
------
$430,500
======
</TABLE>
The Company is currently involved in litigation incidental to the Company's
business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on the accompanying financial
statements.
8. EMPLOYEE BENEFIT PLAN
In March 1995, the Company introduced a 401(k) savings plan for all
full-time employees age 21 or older with one year of service. The maximum
employee contribution is 15% of the participant's compensation. The Company
matches 50% of each dollar contributed by a participant, with a maximum matching
contribution of 3% of a participant's earnings. The Company's contributions to
the plan vest over six years and totaled $37,949 and $34,159 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively.
9. SHAREHOLDERS' EQUITY
The Company has 10,000,000 authorized shares of preferred stock.
In March 1995, the Company established the 1995 Stock Option Plan that
provided for the granting of incentive and nonqualified options to purchase up
to 308,423 shares of common stock. In December 1995, the Company amended the
plan to provide for the granting of options to purchase up to 570,898 shares of
common stock. Generally, options granted vest over a four-year period. Certain
options require acceleration of vesting if specific operational goals are
achieved. Options under this plan have been granted at estimated fair value on
the date of grant and expire after ten years. The plan expires in 2005.
F-14
<PAGE> 75
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity and option price information for the year ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Granted................................................... 516,173 $3.24-$5.11
Canceled.................................................. (30,835) $ 3.24
------
Balance, December 31, 1995 and June 30, 1996.............. 485,338 $3.24-$5.11
======
</TABLE>
In January 1996, an outside member of the Company's Board of Directors
purchased a warrant for $56,000. The warrant provides for the issuance of 41,020
shares of common stock at a price of $4.26 per share. The warrant can be
exercised any time prior to December 2005.
At December 31, 1995, 34,175 options were exercisable and 85,560 shares
were available for future grant. At June 30, 1996, 99,589 options were
exercisable and 85,560 shares were available for future grant.
Prior to the recapitalization of the Company, the President held an option
to purchase up to 10% of the outstanding shares of Gargoyles stock from the
former majority shareholder. In connection with the recapitalization, the new
shareholders of the Company assumed the option and amended certain provisions of
the option agreement. As a result of the amendments, the Company recorded
deferred compensation of $400,000, equal to the difference between the estimated
fair market value of the stock at the date of the recapitalization, and the
option price of $0.85 per share. The amount is being amortized over the option
vesting period.
Also in connection with the recapitalization, the new shareholders granted
the President an additional nonqualified option to purchase 146,500 shares of
common stock owned by the new shareholders at an exercise price of $4.26 per
share. In June 1996, in contemplation of the Company's initial public offering,
the options were further amended to accelerate the vesting and to extend the
expiration date to June 28, 2006. As a result, the remaining balance of $150,000
from the initial $400,000 deferred compensation was expensed and Gargoyles
recognized an additional nonrecurring, noncash stock compensation charge in the
second quarter of 1996 of $3.4 million. Total stock compensation expense related
to these agreements of $3.5 million is reflected as a component of operating
expenses in the six months ended June 30, 1996.
10. RECEIVABLE FROM AFFILIATE
The Company has advanced funds to Conquest Sports, Inc. ("Conquest,"
formerly Pro-Tec, Inc.), an affiliate with similar shareholders as the Company.
In addition, the Company has guaranteed certain liabilities of Conquest.
Conquest has incurred losses in its last two fiscal years and Company management
has concluded that it is likely Conquest will be unable to meet its unsecured
obligations. Accordingly, in the fourth quarter of 1995, the Company recorded a
provision related to Conquest in the amount of $1,597,051.
11. DISCONTINUED DISTRIBUTION AGREEMENT
During late 1994, Gargoyles entered into a nonexclusive agreement (the
"Agreement") to distribute a line of sunglasses produced by another
manufacturer. These sunglasses were produced with the name of a major
manufacturer of athletic shoes and apparel under a license agreement. Gargoyles
had no significant sales under the Agreement prior to 1995. During the fourth
quarter of 1995, both parties agreed to terminate the Agreement. The
accompanying consolidated statement of operations for the year ended December
31, 1995 includes net sales of $758,066, cost of sales of $490,011 and sales and
marketing expenses of $579,972 related to the Agreement.
F-15
<PAGE> 76
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. ACQUISITION OF HOBIE
On February 13, 1996, Gargoyles purchased all of the issued and outstanding
stock of H.S.I. ("Hobie"). Hobie was the manufacturer of Hobie Polarized
Sunglasses under an exclusive license agreement for use of the name Hobie on
sunglasses.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the allocation of the purchase price of $3,974,900, of
which $3,380,014 was paid in cash, has been based on the fair value of the
assets acquired and liabilities assumed. Included in the purchase price are
consulting service fees of up to an aggregate of $300,000 to two of Hobie's
former shareholders. As consideration for certain noncompetition covenants, the
Company agreed to pay an aggregate of $200,000 in 12 monthly installments and
issue an aggregate of 15,634 shares of its common stock to two of Hobie's former
shareholders. Costs in excess of the fair market value of assets and liabilities
acquired are reflected as intangibles, the most significant component of which
is goodwill that is being amortized over the remaining 27-year license period of
the Hobie brand name.
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
<S> <C> <C>
Sales................................................... $21,940,000 $17,938,000
Gross profit............................................ 12,931,000 10,385,000
Net loss................................................ (3,021,000 ) (2,778,000)
</TABLE>
13. SUBSEQUENT EVENTS
Investment in the kindling company
In May 1996, the Company formed Kindling, a majority-owned subsidiary, to
design, develop, manufacture and distribute sunglasses and, with The Timberland
Company's consent, ophthalmic frames under the Timberland brand name. The
Company contributed $1,200,000 for its 70% interest in Kindling. Of that amount,
$100,000 was paid in cash and $1,100,000 by means of a non-interest-bearing
promissory note that is due in installments through January 1997. Between
January 3, 1997 and January 1, 2000, the Company may also be required to
contribute an additional $300,000 to Kindling's capital if Kindling deems such
additional amount necessary and makes a demand.
Stock Dividend
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of common stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Company's initial public offering. The payment of
such dividend is subject to approval by shareholders of the Restated Articles of
Incorporation to increase the number of authorized shares. The accompanying
financial statements have been restated to give effect to the stock dividend.
F-16
<PAGE> 77
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying balance sheets of H.S.I. d/b/a Hobie
Sunglasses as of December 31, 1994 and 1995, and the related statements of
operations and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.S.I. d/b/a Hobie
Sunglasses at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996
F-17
<PAGE> 78
H.S.I.
D/B/A HOBIE SUNGLASSES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY
------------------------- 13,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 83,229 $ 30,972 $ 556
Trade receivables, less allowances for doubtful
accounts
of $50,000........................................ 352,056 346,445 356,217
Inventories.......................................... 771,252 1,199,632 1,249,466
Other current assets and prepaid expenses............ 1,310 10,879 38,636
------- ------- -------
Total current assets................................... 1,207,847 1,587,928 1,644,875
Property and equipment, net............................ 77,471 86,983 94,879
Other assets........................................... 14,250 28,250 18,200
------- ------- -------
Total assets........................................... $1,299,568 $1,703,161 $1,757,954
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank................................. $ 424,317 $ 630,000 $ 580,000
Note payable to shareholder.......................... 285,000 470,000 540,000
Convertible note payable to shareholder.............. 200,000 200,000 200,000
Accounts payable..................................... 30,027 49,191 126,393
Accrued expenses..................................... 34,687 23,615 27,829
------- ------- -------
Total current liabilities.............................. 974,031 1,372,806 1,474,222
------- ------- -------
Shareholders' equity:
Common stock, no par value
Authorized shares -- 10,000,000
Issued and outstanding shares -- 365,000.......... 322,330 322,330 322,330
Retained earnings (deficit).......................... 3,207 8,025 (38,598)
------- ------- -------
Total shareholders' equity............................. 325,537 330,355 283,732
------- ------- -------
Total liabilities and shareholders' equity............. $1,299,568 $1,703,161 $1,757,954
======= ======= =======
</TABLE>
See accompanying notes.
F-18
<PAGE> 79
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
---------- ---------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.............................................. $3,690,701 $4,043,617 $310,953
Cost of sales.......................................... 1,906,805 1,992,181 166,904
---------- ---------- --------
Gross profit........................................... 1,783,896 2,051,436 144,049
---------- ---------- --------
Operating expenses:
Sales and marketing.................................. 984,217 1,175,825 77,486
General and administrative........................... 672,745 679,036 121,816
Shipping and warehousing............................. 43,068 35,066 3,500
---------- ---------- --------
Total operating expenses............................... 1,700,030 1,889,927 202,802
---------- ---------- --------
Income (loss) from operations.......................... 83,866 161,509 (58,753)
---------- ---------- --------
Other income (expense):
Interest expense, net................................ (85,630) (131,090) (12,517)
Other................................................ 13,385 (14,902) 629
---------- ---------- --------
Total other income (expense)........................... (72,245) (145,992) (11,888)
---------- ---------- --------
Income (loss) before income taxes...................... 11,621 15,517 (70,641)
Income tax provision (benefit)......................... 4,087 10,699 (24,018)
---------- ---------- --------
Net income (loss)...................................... 7,534 4,818 (46,623)
Retained earnings (deficit), beginning of period....... (4,327) 3,207 8,025
---------- ---------- --------
Retained earnings (deficit), end of period............. $ 3,207 $ 8,025 $(38,598)
========== ========== ========
</TABLE>
See accompanying notes.
F-19
<PAGE> 80
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
--------- --------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 7,534 $ 4,818 $ (46,623)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 20,796 24,566 3,247
Changes in assets and liabilities:
Accounts receivable.................................. (89,475) 5,611 (9,772)
Inventories.......................................... (269,904) (428,380) (49,834)
Other current assets and other assets................ 20,965 (24,569) (17,707)
Accounts payable..................................... (7,383) 19,164 77,202
Accrued expenses..................................... 20,049 (11,072) 4,214
------ ------ ------
Net cash used in operating activities..................... (297,418) (409,862) (39,273)
------ ------ ------
INVESTING ACTIVITY -- acquisition of property and
equipment............................................... (39,550) (33,078) (11,143)
------ ------ ------
FINANCING ACTIVITIES
Net proceeds (repayments) under bank note payable......... 303,291 205,683 (50,000)
Proceeds from issuance of shareholder note................ 345,000 385,000 270,000
Payments of shareholder note.............................. (260,000) (200,000) (200,000)
------ ------ ------
Net cash provided by financing activities................. 388,291 390,683 20,000
------ ------ ------
Net increase (decrease) in cash and cash equivalents...... 51,323 (52,257) (30,416)
Cash and cash equivalents, beginning of period............ 31,906 83,229 30,972
------ ------ ------
Cash and cash equivalents, end of period.................. $ 83,229 $ 30,972 $ 556
====== ====== ======
</TABLE>
See accompanying notes.
F-20
<PAGE> 81
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 13, 1996 AND FOR THE PERIOD
JANUARY 1, 1996 TO FEBRUARY 13, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry and Sale of Company to Gargoyles
H.S.I. d/b/a Hobie Sunglasses ("Hobie" or "the Company"), a California
corporation formed in March 1989, is primarily involved in the manufacture and
wholesale distribution of Hobie eyewear products. The Company's products are
primarily sold through independent manufacturers' representatives. The Company
subcontracts several of its manufacturing processes. Management believes there
are adequate alternative sources for these services should an existing
subcontractor be unable to perform.
On February 13, 1996, the Company was sold to, and became a wholly owned
subsidiary of, Gargoyles, Inc., another manufacturer of sunglasses. In
connection with the sale, all vested stock options were exercised and all notes
payable were paid. Unaudited information as of February 13, 1996 and for the
period January 1, 1996 to February 13, 1996 reflects the Company's financial
position and results of operations and cash flows up to the date of the sale and
includes all adjustments that the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for that period.
Interim Financial Information
The financial information at February 13, 1996 and for the period from
January 1 to February 13, 1996 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for such period. The Company's net sales are
subject to seasonal variations. Accordingly, operating results for the January 1
to February 13, 1996 period are not necessarily indicative of the results that
may be expected for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer.
Inventories
Inventories are stated at the lower of weighted-average cost or market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease if less than the estimated
useful life.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$84,718 and $107,730 in advertising costs during 1994 and 1995, respectively.
F-21
<PAGE> 82
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
License Agreement
The Company purchased the exclusive right to manufacture and sell
sunglasses and related accessories bearing the "Hobie" trademark. The original
term of the license expires December 31, 2008; however, the Company has three
five-year extension options available. The Company is amortizing the cost of the
license agreement on a straight-line basis over the original term. At December
31, 1994 and 1995, the balance was $14,250 and $13,250, respectively, net of
accumulated amortization of $5,750 and $6,750, respectively. Amortization
expense was $1,000 during 1994 and 1995.
Royalties under the agreement accrue at 2% of net sales, subject to a
minimum annual royalty of $15,000. The Company incurred royalty expense of
$66,065 and $75,146 in 1994 and 1995, respectively.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains an
allowance for doubtful accounts at a level which management believes is
sufficient to cover potential credit losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995.
Stock-Based Compensation
The Company granted stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with the
intrinsic value method of accounting, and, accordingly, recognizes no
compensation expense for the stock option grants.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 regarding accounting for the impairment of long-lived assets. The
Company adopted Statement No. 121, and the effect of the adoption had no
material impact on the Company's financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-22
<PAGE> 83
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- FEBRUARY 13,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
Raw materials................................... $610,437 $ 717,958 $ 776,239
Finished goods.................................. 160,815 481,674 473,227
-------- ---------- ----------
$771,252 $1,199,632 $1,249,466
======== ========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- FEBRUARY 13,
1994 1995 1996
-------- --------- ------------
<S> <C> <C> <C>
Molds and production equipment................ $ 14,913 $ 45,163 $ 56,306
Office and computer equipment................. 81,566 84,394 84,394
Leasehold improvements........................ 33,577 33,577 33,577
------ ------ ------
130,056 163,134 174,277
Less accumulated depreciation and
amortization................................ (52,585) (76,151) (79,398)
------ ------ ------
Furniture and equipment, net.................. $ 77,471 $ 86,983 $ 94,879
====== ====== ======
</TABLE>
4. DEBT
Note Payable to Bank Under Revolving Line of Credit
Under line of credit arrangements for short-term debt with a bank, the
Company may borrow up to $650,000. These arrangements expire August 31, 1996. At
December 31, 1995, the unused portion of the credit line was $20,000. Borrowings
under the arrangements bear interest at the bank's reference rate plus 2% (10.5%
at December 31, 1995), payable monthly. Amounts borrowed under the arrangements
are secured by substantially all accounts receivable, inventories, and
equipment. The arrangements are guaranteed by the majority shareholder.
The credit arrangements require, among other things, that the Company
maintain a minimum tangible net worth and working capital. At December 31, 1995,
the Company was not in compliance with certain of the covenants. The related
balances were fully paid in February 1996 after the acquisition by Gargoyles.
Note Payable to Shareholder
The note payable to shareholder represents working capital advances from
the majority shareholder and from affiliates of this shareholder. These advances
mature on December 31, 1996. Borrowings under the advances bear interest of
11.5%, payable monthly.
Convertible Note Payable to Shareholder
Shareholders and an affiliate of the majority shareholder hold subordinated
convertible notes payable. These notes may be converted into common stock, at
the option of the holder, through maturity at December 1, 1996. The notes
convert at the rate of one common share for each $1.25 in principal and accrued
interest
F-23
<PAGE> 84
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
outstanding. Borrowings bear interest at 8%, payable quarterly. At December 31,
1995, 160,000 shares of common stock were restricted for these notes.
The Company made interest payments totaling $78,003 and $122,130 during the
years ended December 31, 1994 and 1995, respectively.
5. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Current:
Federal......................................................... $2,740 $ 5,160
State........................................................... 800 2,940
---- -----
3,540 8,100
Deferred:
Federal......................................................... 1,287 1,135
State........................................................... (740) 1,464
---- -----
547 2,599
---- -----
Income tax provision.............................................. $4,087 $10,699
==== =====
</TABLE>
A reconciliation of the federal statutory tax rate to the actual provision
is as follows:
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Income tax provision at federal statutory rate (34%).............. $3,951 $ 5,276
State income tax.................................................. 60 4,404
Other, net........................................................ 76 1,019
------ -------
Total provision................................................... $4,087 $10,699
====== =======
</TABLE>
The Company made income tax payments totaling $800 and $0 during the years
ended December 31, 1994 and 1995, respectively.
6. SHAREHOLDERS' EQUITY
The Company has stock option agreements with certain key employees and
consultants. Stock option activity and price information for these agreements
are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance, January 1, 1994.................................. 70,000 $1.00-$1.25
Granted................................................. 35,000 $1.50
------
Balance, December 31, 1994 and 1995....................... 105,000 $1.00-$1.50
======
</TABLE>
At December 31, 1995, 85,000 options were exercisable under these
agreements.
F-24
<PAGE> 85
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases its primary operating and office premises under a
noncancelable operating lease expiring March 1996. Terms of this agreement
include fixed annual rental payment increases. Rent expense under this lease
totaled $30,000 and $52,300 for the years ended December 31, 1994 and 1995,
respectively.
Minimum future lease payments due under noncancelable operating leases are
$11,100 for the year ending December 31, 1996.
F-25
<PAGE> 86
[Product depictions with headings labeled "Technology," "Variety" and
"Function." The following language is included under the "Technology" caption:
"What is the toric curve? The Company's dual lens toric curve design is achieved
through the use of complex lens geometry that incorporates different horizontal
and vertical curvatures, as well as variable, material thicknesses throughout
each lens surface. Each lens is designed to match the contours of the face
without sacrificing overall optical clarity or introducing distortion. The
Company believes its patented technology provides the most advanced lens design
available in wrap sunglasses."
<PAGE> 87
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Pro Forma Financial Information....... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 29
Management............................ 41
Certain Transactions.................. 48
Principal and Selling Shareholders.... 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 58
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,666,667 SHARES
[LOGO]
GARGOYLES(R)
PERFORMANCE EYEWEAR
COMMON STOCK
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant and the
selling shareholders in connection with the sale of the Common Stock being
registered hereby. All amounts shown are estimates, except the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 15,863
NASD filing fee........................................................... 5,100
Nasdaq National Market listing fee........................................ 36,356
Blue Sky fees and expenses................................................ 10,000
Printing and engraving expenses........................................... 75,000
Legal fees and expenses................................................... 320,000
Accounting fees and expenses.............................................. 250,000
Directors and officers insurance.......................................... 122,682
Transfer Agent and Registrar fees......................................... 10,000
Miscellaneous expenses.................................................... 4,999
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Bylaws (Exhibit 3.2 hereto)
provides for indemnification of the registrant's directors, officers, employees
and agents to the maximum extent permitted by Washington law. Certain of the
directors of the registrant, who are affiliated with principal shareholders of
the registrant, also may be indemnified by such shareholders against liability
they may incur in their capacities as directors of the registrant, including
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, knowing violations of
law or illegal corporate loans or distributions, or any transaction from which
the director personally receives a benefit in money, property or services to
which the director is not legally entitled. Article 8 of the registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The registrant has entered into an indemnification agreement with each of
its directors in which the registrant agrees to hold harmless and indemnify the
director to the fullest extent permitted by Washington law. The registrant
agrees to indemnify the director against any and all losses, claims, damages,
liabilities or expenses incurred in connection with any actual, pending or
threatened action, suit, claim or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal, in which the
director is, was or becomes involved by reason of the fact that the director is
or was a director, officer, employee, trustee or agent of the registrant or any
related company, partnership, joint venture, trust or enterprise, including
service with respect to an employee benefit plan, whether the basis of such
proceeding is alleged action (or inaction) by the director in an official
capacity or in any other capacity while serving as a director, officer,
II-1
<PAGE> 89
employee, trustee or agent, other than an action, suit, claim or proceeding
instituted by or at the direction of the officer or director unless such action,
suit, claim or proceeding is or was authorized by the registrant's Board of
Directors. No indemnity pursuant to the indemnification agreements shall be
provided by the registrant on account of any suit in which a final, unappealable
judgment is rendered against the officer or director for an accounting of
profits made from the purchase or sale by the officer or director of securities
of the registrant in violation of the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and amendments thereto, or for
damages that have been paid directly to the officer or director by an insurance
carrier under a policy of directors' and officers' liability insurance
maintained by the registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the Underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the Underwriters for
inclusion in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 1, 1993, the registrant has issued and sold the following
unregistered securities:
1. On March 22, 1995, the registrant issued an aggregate of 3,516,003
shares of Common Stock to 14 individuals and one corporation for a
consideration of $1.53 per share or an aggregate of $5,387,498.
2. On January 12, 1996, in exchange for $56,000, the registrant issued
a warrant to purchase 41,020 shares of Common Stock exercisable at $4.26
per share to one of the registrant's directors. The expiration date for the
warrant is December 8, 2005.
3. On February 13, 1996, the registrant issued an aggregate of 15,634
shares of Common Stock to two individuals in consideration for certain
confidentiality and noncompetition convenants.
The registrant believes that each of the above listed sales and issuances
of securities were exempt from registration under the Securities Act principally
by virtue of Section 4(2) thereof as transactions not involving any public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Articles of Incorporation of the registrant currently
in effect
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering
3.2(a) Bylaws of the registrant currently in effect
3.2(b) Form of Bylaws of the registrant to become effective prior to the closing
of the Offering
5.1* Opinion of Perkins Coie regarding legality of shares
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles and
certain other parties
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made by
Gargoyles, Inc. to Dennis Burns (the "Founder")
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.
</TABLE>
II-2
<PAGE> 90
<TABLE>
<S> <C>
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank
of Washington, National Association
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of Washington,
National Association and Gargoyles, Inc.
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington, National
Association
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington, National
Association
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc. and
Trillium Corporation
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December 16,
1993, between Gargoyles, Inc. and DB&D Partnership
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master Sports
Equipment GmbH
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles, Inc.,
Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996, between
Gargoyles, Inc. and Wally Walker
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff
10.34 Assignment and Assumption of Amended and Restated Option Agreement, dated
as of March 22, 1995, between the Founder and the Investors listed therein
</TABLE>
II-3
<PAGE> 91
<TABLE>
<S> <C>
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein
10.36+** License Agreement between Gargoyles, Inc. and Dale Earnhardt
10.37+ License Agreement, dated as of October 1995, as amended as of October 18,
1995, between Gargoyles, Inc. and Ken Griffey, Jr.
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Douglas B. Hauff
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Steven R. Kingma
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and David W. Jobe
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors
10.43 1995 Stock Incentive Compensation Plan
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of Washington,
National Association
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc., as
amended
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3, 1996,
by and between the Founder, Gargoyles, Inc. and Conquest Sports, Inc.
10.48+* Settlement Agreement and General Release, dated as of April 12, 1995
10.49+ Trademark License Agreement dated as of April 12, 1995
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the kindling
company (formerly The D.W. Lauer Company)
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W. Lauer
Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland Company
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland Company,
Gargoyles, Inc. and the kindling company
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between Gargoyles,
Inc. and Douglas W. Lauer
10.57 License Agreement, effective January 1, 1989, between Hobie Designs, Inc.
and H.S.I.
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc.
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc.
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.61 Form of Promissory Note made by Gargoyles, Inc. to Trillium Corporation
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
11.1 Computation of pro forma net income (loss) per share
16.1* Letter regarding change in accountants
</TABLE>
II-4
<PAGE> 92
<TABLE>
<S> <C>
21.1 Subsidiaries of the registrant
23.1* Consent of Ernst & Young LLP, Independent Accountants (contained on page
II-8)
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto)
24.1 Power of Attorney
24.2* Power of Attorney for William D. Ruckelshaus (contained on signature page)
27.1* Financial Data Schedule
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 12th day of August, 1996.
GARGOYLES, INC.
By: /s/ DOUGLAS B. HAUFF
------------------------------------
Douglas B. Hauff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 12th day of August, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DOUGLAS B. HAUFF President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Douglas B. Hauff
/s/ STEVEN R. KINGMA Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Treasurer (Principal Financial
Steven R. Kingma and Accounting Officer)
Chairman of the Board
/s/ *ERIK J. ANDERSON
- ---------------------------------------------
Erik J. Anderson
/s/ *TIMOTHY C. POTTS Director
- ---------------------------------------------
Timothy C. Potts
/s/ *PAUL S. SHIPMAN Director
- ---------------------------------------------
Paul S. Shipman
/s/ *WALTER F. WALKER Director
- ---------------------------------------------
Walter F. Walker
*By /s/ DOUGLAS B. HAUFF
- ---------------------------------------------
Douglas B. Hauff
Attorney-in-Fact
</TABLE>
POWER OF ATTORNEY
The individual whose signature appears below hereby authorizes and appoints
Douglas B. Hauff and Steven R. Kingma, and each of them, with full power of
substitution and resubstitution and full power to act without the other, as his
true and lawful attorney-in-fact and agent to act in his name, place and stead
and to execute in the name and on behalf of each person, individually and in
each capacity stated below, and to file,
II-6
<PAGE> 94
any and all amendments to this Registration Statement, including any and all
post-effective amendments and amendments thereto and any registration statement
relating to the same offering as this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their and his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following person in the
capacity indicated below on the 13th day of August, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ WILLIAM D. RUCKELSHAUS Director
- ---------------------------------------------
William D. Ruckelshaus
</TABLE>
II-7
<PAGE> 95
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of the form of our report dated
June 14, 1996, except for the second paragraph of Note 13, as to which the date
is , 1996, which will be signed upon the completion of the stock
dividend described in Note 13 to the consolidated financial statements with
respect to Gargoyles, Inc. and to the use of our report dated June 14, 1996 with
respect to H.S.I. d/b/a Hobie Sunglasses in the Registration Statement (Form
S-1) and related Prospectus of Gargoyles, Inc. for the registration of 3,066,667
shares of its Common Stock.
ERNST & YOUNG LLP
Seattle, Washington
August 12, 1996
II-8
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement..........................................
3.1(a) Amended and Restated Articles of Incorporation of the registrant
currently in effect.....................................................
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering................
3.2(a) Bylaws of the registrant currently in effect............................
3.2(b) Form of Bylaws of the registrant to become effective prior to the
closing of the Offering.................................................
5.1* Opinion of Perkins Coie regarding legality of shares....................
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles
and certain other parties...............................................
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation...........................................
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made
by Gargoyles, Inc. to Dennis Burns (the "Founder")......................
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder...........................
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder..............
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder.....................................
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc. ...................
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association................................
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc. ...................
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association................
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association.............................................................
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington,
National Association....................................................
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association............
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington,
National Association....................................................
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc.
and Trillium Corporation................................................
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein.....................
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors.....................
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December
16, 1993, between Gargoyles, Inc. and DB&D Partnership..................
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership........................................................
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master
Sports Equipment GmbH...................................................
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles,
Inc., Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein.............................................
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996,
between Gargoyles, Inc. and Wally Walker................................
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff.......................
10.34 Assignment and Assumption of Amended and Restated Option Agreement,
dated as of March 22, 1995, between the Founder and the Investors listed
therein.................................................................
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein............................................
10.36+** License Agreement between Gargoyles, Inc. and Dale Earnhardt............
10.37+ License Agreement, dated as of October 1995, as amended as of October
18, 1995, between Gargoyles, Inc. and Ken Griffey, Jr. .................
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Douglas B. Hauff...............................................
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Steven R. Kingma...............................................
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth................................................
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and David W. Jobe..................................................
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors...............................................................
10.43 1995 Stock Incentive Compensation Plan..................................
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation.........................................
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc.,
as amended..............................................................
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3,
1996, by and between the Founder, Gargoyles, Inc. and Conquest Sports,
Inc. ...................................................................
10.48+* Settlement Agreement and General Release, dated as of April 12, 1995....
10.49+ Trademark License Agreement dated as of April 12, 1995..................
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the
kindling company (formerly The D.W. Lauer Company)......................
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company........................................................
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to
the kindling company....................................................
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company..........................................
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W.
Lauer Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland
Company.................................................................
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland
Company, Gargoyles, Inc. and the kindling company.......................
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between
Gargoyles, Inc. and Douglas W. Lauer....................................
10.57 License Agreement, effective January 1, 1989, between Hobie Designs,
Inc. and H.S.I. ........................................................
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc. ........................................................
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc. ..............................................
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
10.61 Form of Promissory Note made by Gargoyles, Inc. to Trillium
Corporation.............................................................
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc. ......
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
11.1 Computation of pro forma net income (loss) per share....................
16.1* Letter regarding change in accountants..................................
21.1 Subsidiaries of the registrant..........................................
23.1* Consent of Ernst & Young LLP, Independent Accountants (contained on
page II-8)..............................................................
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto).................................................................
24.1 Power of Attorney.......................................................
24.2* Power of Attorney for William D. Ruckelshaus (contained on signature
page)...................................................................
27.1* Financial Data Schedule.................................................
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
2,666,667 SHARES
GARGOYLES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Gargoyles, Inc., a Washington corporation (the "Company"), proposes to
issue and sell an aggregate of 1,666,667 shares of its common stock, without par
value, to the several Underwriters named in Schedule II hereto (the
"Underwriters") and the persons named in Schedule I hereto (the "Selling
Shareholders") propose to sell to the several Underwriters an aggregate of
1,000,000 shares of common stock of the Company. The Company and the Selling
Shareholders are hereinafter sometimes referred to as the "Sellers." The
Company's common stock, without par value, is hereinafter referred to as the
"Common Stock" and the 1,666,667 shares of Common Stock to be issued and sold to
the Underwriters by the Company and the 1,000,000 shares of Common Stock to be
sold to the Underwriters by the Selling Shareholders are hereinafter referred to
as the "Firm Shares." The Company and the Selling Shareholders listed in
Schedule I hereto also propose to sell to the Underwriters, upon the terms and
conditions set forth in Section 2 hereof, up to an additional 400,000 shares
(the "Additional Shares") of Common Stock. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares."
The Company and the Selling Shareholders wish to confirm as follows their
respective agreements with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-07573) (the
"registration statement"), including a prospectus subject to completion relating
to the Shares. The term "Registration Statement" as used in this Agreement means
the registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term
1
<PAGE> 2
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
2. Agreements to Sell and Purchase. Subject to such adjustments as you may
determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Shareholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $ per Share (the "purchase price per share"), the number of
Firm Shares which bears the same proportion to the aggregate number of Firm
Shares to be issued and sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Shareholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Shareholder agrees, subject to all the terms and
conditions set forth herein, to sell to each Underwriter and, upon the basis of
the representations, warranties and agreements of the Company and the Selling
Shareholders herein contained and subject to all the terms and conditions set
forth herein, each Underwriter, severally and not jointly, agrees to purchase
from each Selling Shareholder at the purchase price per share that number of
Firm Shares which bears the same proportion to the number of Firm Shares set
forth opposite the name of such Selling Shareholder in Schedule I hereto as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Shareholders.
The Company and the Selling Shareholders listed in Schedule I hereto also
agree, subject to all the terms and conditions set forth herein, to sell to the
Underwriters, and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Shareholders herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company and the Selling Shareholders listed
in Schedule I hereto, at the purchase price per share, pursuant to an option
(the "over-allotment option") which may be exercised at any time and from time
to time prior to 9:00 P.M., New York City time, on the 30th day after the date
of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of 157,500 Additional Shares from the
Company and up to an aggregate of 242,500 shares from the Selling Shareholders
listed in Schedule I hereto (the maximum number of Additional Shares which each
of them agrees to sell upon the exercise by the Underwriters of the
over-allotment option is set forth opposite their respective names in Part B of
Schedule I). Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. In the
event that the over-allotment option is exercised for less than 400,000 shares
but more than 242,500 shares, a total of 242,500 shares will be sold by the
Selling Shareholders in amounts set forth in Schedule I and the remaining shares
subject to the over-allotment option will be sold by the Company. In the event
that the over-allotment option is exercised for less than 242,500 shares, all
shares sold pursuant to the over-allotment option will be sold by the Selling
Shareholders in such amounts that are proportionate to the respective maximum
number of Additional Shares which such selling Shareholder have agreed to sell
as set forth on Schedule I. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder the number of Additional Shares (subject to such
adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of Additional Shares to be sold by the
Company and each Selling Shareholder as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto (or such number of
Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate
number of Firm Shares to be sold by the Company.
2
<PAGE> 3
Certificates in transferable form for the Shares (including any Additional
Shares) which each of the Selling Shareholders agrees to sell pursuant to this
Agreement have been placed in custody with First National Bank of Boston (the
"Custodian") for delivery under this Agreement pursuant to the Founder Custody
Agreement and Power of Attorney (the "Founder Custody Agreement") executed by
Dennis L. Burns (the "Founder") appointing David B. McClinton as agent and
attorney-in-fact (the "Founder Attorney-in-Fact"). Each Selling Shareholder
agrees that (i) the Shares represented by the certificates held in custody
pursuant to the Founder Custody Agreement are subject to the interests of the
Underwriters, the Company and each other Selling Shareholder, (ii) the
arrangements made by the Selling Shareholders for such custody are, except as
specifically provided in the Founder Custody Agreement, irrevocable, and (iii)
the obligations of each of the Selling Shareholders hereunder and under the
Founder Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of any
Selling Shareholder or the occurrence of any other event. If any Selling
Shareholder shall die or be incapacitated or if any other event shall occur
before the delivery of the Shares hereunder, certificates for the Shares of such
Selling Shareholder shall be delivered to the Underwriters by the Founder
Attorney-in-Fact in accordance with the terms and conditions of this Agreement
and the Founder Custody Agreement as if such death or incapacity or other event
had not occurred, regardless of whether or not the Founder Attorney-in-Fact or
any Underwriter shall have received notice of such death, incapacity or other
event. The Founder Attorney-in-Fact is authorized, on behalf of the Founder, to
execute this Agreement and any other documents necessary or desirable in
connection with the sale of the Shares to be sold hereunder by such Selling
Shareholder, to make delivery of the certificates for such Shares, to receive
the proceeds of the sale of such Shares, to give receipts for such proceeds, to
distribute such proceeds to such Selling Shareholder, and to take such other
action as may be necessary or desirable in connection with the transactions
contemplated by this Agreement. The Founder Attorney-in-Fact agrees to perform
his respective duties under the Founder Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 8:30 A.M., New
York City time, on , 1996 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among you,
the Company, Trillium and the Founder Attorney-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company, Trillium and the
Founder Attorney-in-Fact of the Underwriters' determination to purchase a
number, specified in such notice, of Additional Shares. The place of closing for
any Additional Shares and the Option Closing Date for such Additional Shares may
be varied by agreement among you, the Company, Trillium and the Founder
Attorney-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by wire transfer payable to the order of the Company and the
Custodian or Selling Shareholders.
3
<PAGE> 4
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the Company will endeavor to cause the Registration Statement or
such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice
in writing, when the Registration Statement or such post-effective
amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period
of time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth
or results of operations, or of the happening of any event, which makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus (as then amended or supplemented) in order to state a material
fact required by the Act or the regulations thereunder to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading, or of the necessity
to amend or supplement the Prospectus (as then amended or supplemented) to
comply with the Act or any other law. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, three signed
copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements
and all exhibits thereto, and will also furnish to you, without charge,
such number of conformed copies of the registration statement as originally
filed and of each amendment thereto as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which
you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for
the Underwriters, a Prospectus is required to be delivered in connection
with sales by any Underwriter or dealer, file any information, documents or
reports pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), without delivering a copy of such information, documents
or reports to you, as Representatives of the Underwriters, prior to or
concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with
the securities or Blue Sky laws of the jurisdictions in which the Shares
are offered by the several Underwriters and by dealers, prior to the date
of the Prospectus, of each Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the
Company will expeditiously deliver to each Underwriter and each dealer,
without charge, as many copies of the Prospectus (and of any amendment or
supplement thereto) as you may request. The Company consents to the use of
the Prospectus (and of any amendment or supplement thereto) in accordance
with the provisions of the Act and with the securities or Blue Sky laws of
the jurisdictions in which the Shares are offered by the several
Underwriters and by all dealers to whom Shares may be sold, both in
connection with the offering and
4
<PAGE> 5
sale of the Shares and for such period of time thereafter as the Prospectus
is required by the Act to be delivered in connection with sales by any
Underwriter or dealer. If during such period of time any event shall occur
that in the judgment of the Company or in the opinion of counsel for the
Underwriters is required to be set forth in the Prospectus (as then amended
or supplemented) or should be set forth therein in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary to supplement or amend the
Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above,
file with the Commission an appropriate supplement or amendment thereto,
and will expeditiously furnish to the Underwriters and dealers a reasonable
number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus
should be amended or supplemented, the Company, if requested by you, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to service of process in
suits, other than those arising out of the offering or sale of the Shares,
in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a 12
month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the
Company mailed to shareholders or filed with the Commission and (ii) from
time to time such other information concerning the Company as you may
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company or the Selling Shareholders to comply
with the terms or fulfill any of the conditions of this Agreement, the
Company agrees to reimburse the Representatives for all out-of-pocket
expenses (including fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A promulgated under the Act is employed, the Company
will timely file the Prospectus pursuant to Rule 424(b) under the Act and
will advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
contract to sell or otherwise dispose of any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or grant
any options or warrants to purchase Common Stock, for a period of 180 days
after the date of the Prospectus, without the prior written consent of
Smith Barney Inc., other than (i) grants of awards pursuant to the
Company's 1995 Amended and Restated Stock Incentive Compensation Plan in
the form in effect on the date hereof and (ii) issuances of shares of
Common Stock pursuant to stock options or warrants outstanding on the date
hereof and awards made pursuant to the preceding clause (i).
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<PAGE> 6
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its shareholders designated by
you.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
6. Agreements of the Selling Shareholders. (i) Each of the Selling
Shareholders agrees, severally and not jointly, with the several Underwriters as
follows:
(a) Such Selling Shareholder will cooperate to the extent reasonably
necessary to cause the registration statement or any post-effective
amendment thereto to become effective at the earliest possible time.
(b) Such Selling Shareholder will pay all federal and other taxes, if
any, on the transfer or sale of the Shares being sold by the Selling
Shareholder to the Underwriters.
(c) Such Selling Shareholder will do or perform all things required to
be done or performed by the Selling Shareholder prior to the Closing Date
or any Option Closing Date, as the case may be, to satisfy all conditions
precedent to the delivery of the Shares pursuant to this Agreement.
(d) Such Selling Shareholder has executed or will execute a "lock-up"
letter as provided in Section 5(n) hereof and will not sell, contract to
sell or otherwise dispose of any Common Stock, except for the sale of
Shares to the Underwriters pursuant to this Agreement, prior to the
expiration of 180 days after the date of the Prospectus, without the prior
written consent of Smith Barney Inc.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Shareholder will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly, and, if
requested by you, will confirm such advice in writing, within the period of
time referred to in Section 5(f) hereof, of any change in the information
relating to such Selling Shareholder that is contained in the Registration
Statement that suggests that such information is or may be untrue in any
material respect.
(ii) In addition, Trillium, agrees that Trillium will advise you promptly,
and if requested by you, will confirm such advice in writing, within the period
of time referred to in Section 5(f) hereof, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations or of any change in information relating to such Selling
Shareholder or the Company or any new information relating to the Company or
relating to any matter stated in the Prospectus or any amendment or supplement
thereto which comes to the attention of Trillium that suggests that any
statement made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any material
respect or that the Registration Statement or Prospectus (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a material
fact or a fact necessary to be stated therein in order to make the statements
therein not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
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<PAGE> 7
7. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any
post-effective amendment thereto shall become effective and the Prospectus
and any supplement or amendment thereto when filed with the Commission
under Rule 424(b) under the Act, complied or will comply in all material
respects with the provisions of the Act and did not or will not at any such
times contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by or on behalf of any Underwriter through you expressly for use therein.
(c) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been approved for listing on
the Nasdaq National Market, subject to official notice of issuance, have
been issued in compliance with all federal and state securities laws, were
not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities except for such rights that
have been waived, and conform to the description thereof contained in the
Prospectus. Except as disclosed in or contemplated by the Prospectus and
the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any Subsidiary (as
hereinafter defined) has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights. The
Shares to be sold by the Company have been duly authorized and, when
issued, delivered and paid for in the manner set forth in this Agreement,
will be validly issued, fully paid and nonassessable, and will conform to
the description thereof contained in the Prospectus.
(d) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature of
its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and
the Subsidiaries (as hereinafter defined) taken as a whole.
(e) All the Company's subsidiaries (collectively, the "Subsidiaries")
are listed on Exhibit 21 to the Registration Statement. Each Subsidiary is
a corporation duly organized, validly existing and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, properties,
net worth or results of operations
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<PAGE> 8
of such Subsidiary; all the outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and are owned by the Company directly, or
indirectly through one of the other Subsidiaries; all the outstanding
shares of H.S.I. and H.S.C., Inc. are owned by the Company directly, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance; and 70% of the outstanding shares of the kindling company are
owned by the Company directly, free and clear of any lien, adverse claim,
security interest, equity or other encumbrance except that 10% of the
outstanding shares of the kindling company owned by the Company are subject
to certain agreements with executive officers of the kindling company as
described in the Prospectus.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries or any of
their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or
other instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required by the
Act.
(g) Neither the Company nor any of the Subsidiaries is in violation of
its certificate or articles of incorporation or bylaws, or other
organizational documents, or in violation in any material respect of any
law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries, or in default in any material respect
in the performance of any obligation, agreement or condition contained in
any bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or
any of their respective properties may be bound, other than violations that
have been validly waived.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i)
requires any consent, approval, authorization or other order of or
registration or filing with any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as may
be required for the registration of the Shares under the Act and the
Exchange Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or
will constitute a breach of, or a default under, the certificate or
articles of incorporation or bylaws, or other organizational documents, of
the Company or any of the Subsidiaries or (ii) conflicts or will conflict
with or constitutes or will constitute a breach of, or a default under, any
agreement, indenture, lease or other instrument to which the Company or any
of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound other than conflicts, breaches or
violations that would not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole, or
violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any of
the Subsidiaries or any of their respective properties, or will result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party or
by which any of them may be bound or to which any of the property or assets
of any of them is subject.
(i) Each of the Company and its Subsidiaries maintain insurance of the
types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal
property owned or leased by the Company and the Subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
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<PAGE> 9
(j) The accountants, Ernst & Young LLP, who have issued their opinion
on the financial statements of the Company as of November 30, 1994 and
December 31, 1995 and for the years ended November 30, 1993 and 1994, the
one month period ended December 31, 1994 and the year ended December 31,
1995 included in the Registration Statement and the Prospectus (or any
amendment or supplement thereto) are independent public accountants as
required by the Act. The financial statements, together with related notes,
included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and cash flows of the Company and the
Subsidiaries in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein. The unaudited interim financial data and information included in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto) has been prepared on a basis consistent with that of
the annual financial statements and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary
for a fair presentation of the financial position at the applicable dates
and the operating results and cash flows for those periods.
(k) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as rights to indemnity and contribution hereunder
may be limited by federal or state securities laws or public policy and
subject to the qualification that the enforceability of the Company's
obligations hereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and by general equitable principles.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability
or obligation, direct or contingent, or entered into any transaction, not
in the ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
capital stock, or material increase in the short-term debt or long-term
debt, of the Company or any of the Subsidiaries, or any material adverse
change, or any development involving or which may reasonably be expected to
involve, a prospective material adverse change, in the condition (financial
or other), business, net worth or results of operations of the Company and
the Subsidiaries taken as a whole.
(m) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as
being owned by it, free and clear of all liens, claims, security interests
or other encumbrances, except such as are described in the Registration
Statement and the Prospectus or in a document filed as an exhibit to the
Registration Statement, and all the property described in the Prospectus as
being held under lease by each of the Company and the Subsidiaries is held
by it under valid, subsisting and enforceable leases, except to the extent
that the failure to hold such title or such leases would not have a
material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(n) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted
by the Act.
(o) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties
and to conduct its business in the manner described in the Prospectus,
subject to such qualifications as may be set forth in the Prospectus; the
Company and each of the Subsidiaries has fulfilled and performed all its
material obligations with respect to such permits and no event has occurred
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<PAGE> 10
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the
rights of the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, none of such permits contains any restriction
that is materially burdensome to the Company or any of the Subsidiaries.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(q) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment and hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received all permits, licenses and other approvals
required of it under applicable Environmental Laws to conduct its business,
and (iii) is in compliance with all terms and conditions of any such
permit, license or approval, except to the extent that any failure to
comply with such laws and regulations, to receive any such permit, license
or approval or failure to comply with the terms and conditions of any such
permit, license or approval would not, individually or in the aggregate,
have a material adverse effect on the Company. The Company has not been
named as a "potentially responsible party" under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended.
(r) The Company and the Subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or the Subsidiaries which could materially and adversely affect the
condition (financial or otherwise), business, results of operations or
prospects of the Company or the Subsidiaries.
(s) Except as disclosed in or specifically contemplated by the
Prospectus, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company because of the filing of the registration statement or consummation
of the transactions contemplated by this Agreement.
(t) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and the Subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights, copyrights,
licenses, approvals or governmental authorizations would not have a
material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or the
Subsidiaries; and the Company has no knowledge of any material infringement
by it or the Subsidiaries of trademark, trade name rights, patent rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or the
Subsidiaries regarding trademark, trade name, patent, copyright, license,
trade secret or other infringement which could have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company or the Subsidiaries.
(u) The Company is not now, and after sale of the Shares to be sold by
it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not
be, an "investment company" within the meaning of the Investment Company
Act of 1940, as amended.
(v) The Company has filed a registration statement pursuant to 12(g)
of the Exchange Act to register the Common Stock.
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<PAGE> 11
(w) The Company and the Subsidiaries have complied with all provisions
of Florida Statutes, sec. 517.075, relating to issuers doing business with
Cuba.
(x) Neither the Company nor any of the Subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution
in violation of law, (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof or (iii) made any
payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in
the Prospectus.
8. Representations and Warranties of the Selling Shareholders. (i) Each
Selling Shareholder represents and warrants to each Underwriter that:
(a) On the Closing Date and any Option Closing Date, such Selling
Shareholder will have valid and marketable title to the Shares to be sold
by such Selling Shareholder, free and clear of any lien, claim, security
interest or other encumbrance, including, without limitation, any
restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date and any
Option Closing Date will have, full legal right, power and authorization,
and any approval required by law, to sell, assign transfer and deliver such
Shares in the manner provided in this Agreement, and upon delivery of and
payment for such Shares hereunder, the several Underwriters will acquire
valid and marketable title to such Shares, free and clear of any lien,
claim, security interest or other encumbrance.
(c) This Agreement and the Founder Custody Agreement have been duly
authorized, executed and delivered by or on behalf of such Selling
Shareholder and are the valid and binding agreements of such Selling
Shareholder enforceable against such Selling Shareholder in accordance with
their respective terms, except as enforcement of rights of indemnity and
contribution under this Agreement may be limited by federal or state
securities laws or public policy and subject to the qualification that the
enforceability of such Selling Shareholder's obligations hereunder and
under the Founder Custody Agreement may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights generally and by general
equitable principles.
(d) Neither the execution and delivery of this Agreement or the
Founder Custody Agreement by or on behalf of such Selling Shareholder nor
the consummation of the transactions herein or therein contemplated by or
on behalf of such Selling Shareholder requires any consent, approval,
authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required under the Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) or conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, or violates
or will violate, any agreement, indenture or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder is or
may be bound or to which any of such Selling Shareholder's property or
assets is subject, or any statute, law, rule, regulation, ruling, judgment,
injunction, order or decree applicable to such Selling Shareholder or to
any property or assets of such Selling Shareholder.
(e) The Registration Statement and the Prospectus, insofar as they
relate to such Selling Shareholder, do not and will not contain an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein in light of
the circumstances in which they were made not misleading.
(f) The representations and warranties of such Selling Shareholder in
the Founder Custody Agreement are, and on the Closing Date and any Option
Closing Date will be, true and correct.
(g) Such Selling Shareholder has not taken, directly or indirectly,
any action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the
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<PAGE> 12
Common Stock to facilitate the sale or resale of the Shares, except for the
lock-up arrangements described in the Prospectus.
(ii) In addition, Trillium represents and warrants that Trillium does not
have any knowledge or any reason to believe that the Registration Statement or
the Prospectus (or any amendment or supplement thereto) contains any untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading.
9. Indemnification and Contribution. (a) The Company and Trillium (the
"Indemnifying Selling Shareholder"), jointly and severally, agree to indemnify
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith;
provided, however, that the indemnification contained in this paragraph (a) with
respect to any Prepricing Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by such Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person within the time required by
the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
such Prepricing Prospectus was corrected in the Prospectus, provided that the
Company has delivered the Prospectus to the several Underwriters in requisite
quantity on a timely basis to permit such delivery or sending. Notwithstanding
the foregoing, the aggregate liability of Trillium pursuant to the provisions of
this paragraph shall be limited to an amount equal to the aggregate purchase
price received by the Selling Shareholders from the sale of the Shares
hereunder. The foregoing indemnity agreement shall be in addition to any
liability which the Company or the Indemnifying Selling Shareholder may
otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or the Indemnifying Selling
Shareholder, such Underwriter or such controlling person shall promptly notify
the parties against whom indemnification is being sought (the "indemnifying
parties"), and such indemnifying parties shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action, suit or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying parties and such Underwriter or such controlling person shall
have been advised by its counsel that representation of such indemnified party
and any indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Underwriter or such controlling person). It is understood, however, that the
indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at
12
<PAGE> 13
any time for all such Underwriters and controlling persons not having actual or
potential differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The indemnifying parties shall not be
liable for any settlement of any such action, suit or proceeding effected
without their written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each Selling Shareholder, and any person who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company and the
Indemnifying Selling Shareholders to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against the Company,
any of its directors, any such officer, any Selling Shareholder, or any such
controlling person based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this paragraph
(c), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) hereof (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, the Selling Shareholder, and any such
controlling person shall have the rights and duties given to the Underwriters by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under paragraph (a) or (c) hereof in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Shareholders on the one hand and the Underwriters on the other hand
from the offering of the Shares, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus; provided that, in the
event that the Underwriters shall have purchased any Additional Shares
hereunder, any determination of the relative benefits received by the Company,
the Selling Shareholders or the Underwriters from the offering of the Shares
shall include the net proceeds (before deducting expenses) received by the
Company and the Selling Shareholders, and the underwriting discounts and
commissions received by the Underwriters, from the sale of such Additional
Shares, in each case computed on the basis of the respective amounts set forth
in the notes to the table on the cover page of the Prospectus. The relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
13
<PAGE> 14
(e) The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by a pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in paragraph (d)
above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission and (ii) Trillium shall not be required to contribute
pursuant to this subsection (e) any amount in excess of the amount by which the
total gross proceeds received by the Selling Shareholders from the sale of the
Shares exceeds the amount of any damages which Trillium has otherwise been
required to pay pursuant to this Section. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule II hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Shareholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
9.
10. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A
under the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge
of the Company or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth or results of operations of the Company or
the Subsidiaries not
14
<PAGE> 15
contemplated by the Prospectus, which in your opinion, as Representatives
of the several Underwriters, would materially adversely affect the market
for the Shares, or (ii) any event or development relating to or involving
the Company or any officer or director of the Company or any Selling
Shareholder which makes any statement made in the Prospectus untrue in any
material respect or which, in the opinion of the Company and its counsel or
the Underwriters and their counsel, requires the making of any addition to
or change in the Prospectus in order to state a material fact required by
the Act or any other law to be stated therein or necessary in order to make
the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect
the market for the Shares.
(c) You shall have received on the Closing Date an opinion of Perkins
Coie, counsel for the Company and Trillium, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, in the
form set forth as Exhibit A hereto.
(d) You shall have received on the Closing Date, an opinion of Bogle &
Gates P.L.L.C., counsel for the Founder, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters in the
form attached as Exhibit B hereto.
(e) You shall have received on the Closing Date an opinion of Heller,
Ehrman, White & McAuliffe, counsel for the Underwriters, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters,
with respect to the incorporation of the Company, the sufficiency of all
corporate proceedings and other legal matters relating to this Agreement,
the validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require, and the
Company shall have furnished to such counsel such documents and shall have
exhibited to them such papers and records as they may reasonably request
for the purpose of enabling them to pass upon such matters. In connection
with such opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental officials.
(f) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and
the Closing Date, from Ernst & Young LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(g) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be contemplated
by the Commission at or prior to the Closing Date; (ii) there shall not
have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in
the ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), except as may otherwise be stated
in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition
(financial or other), business, prospects, properties, net worth or results
of operations of the Company and the Subsidiaries taken as a whole; (iv)
the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as
a whole, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the date
hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by the chief executive officer and the chief financial
officer of the Company (or such other officers as are acceptable to you),
to the effect set forth in this paragraph (g) and in paragraph (h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained
and required to be performed or complied with by it hereunder at or prior
to the Closing Date.
15
<PAGE> 16
(i) All the representations and warranties of the Selling Shareholders
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by or on behalf of the Selling Shareholders to the effect
set forth in this paragraph (i) and in paragraph (j) hereof.
(j) The Selling Shareholders shall not have failed at or prior to the
Closing Date to have performed or complied with any of their agreements
herein contained and required to be performed or complied with by them
hereunder at or prior to the Closing Date.
(k) The Shares shall have been listed or approved for listing upon
notice of issuance on the Nasdaq National Market.
(l) The Sellers shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or
Trillium or any Selling Shareholder and delivered to you, as Representatives of
the Underwriters, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company or the particular Selling
Shareholder, as the case may be, to each Underwriter as to the statements made
therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (i) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by the Sellers of
their obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the original issuance and sale of the Shares; (iv) the
printing (or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares; (v)
the registration of the Shares under the Exchange Act and the listing of the
Shares on the Nasdaq National Market; (vi) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the fees and expenses of counsel for the Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) up to $40,000 of the expenses incurred
by the Founder in connection with the sale of the Shares held by him and fees
and expenses of counsel for the Selling Shareholders. In addition, each Selling
Shareholder will pay $25,000 of the expenses incurred by the Company pursuant to
this Section 11.
16
<PAGE> 17
12. Effective Date of Agreement. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several Underwriters, by notifying the Company
and the Selling Shareholders.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Underwriters are obligated
to purchase on the Closing Date, each nondefaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all nondefaulting Underwriters or in
such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more nondefaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any nondefaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any such default of any such Underwriter under this Agreement. The term
"Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule II hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Underwriter
is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Shareholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Additional Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market shall have been suspended or materially
limited, (ii) a general moratorium on commercial banking activities in New York
or Washington State shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
14. Information Furnished by the Underwriters. The statements set forth in
the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first and third paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
17
<PAGE> 18
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 5866 S. 194th Street, Kent, Washington 98032, Attention: Douglas B.
Hauff; or (ii) if to Trillium, at , Attention:
, or (iii) if to the Founder, at , or (iv) if to you, as
Representatives of the several Underwriters, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, and the other controlling
persons referred to in Section 9 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
18
<PAGE> 19
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
GARGOYLES, INC.
By
--------------------------------------
President and Chief Executive
Officer
DENNIS L. BURNS
By
--------------------------------------
Attorney-in-Fact
TRILLIUM INVESTORS II, L.P.
By
--------------------------------------
Its
--------------------------------------
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the Several
Underwriters
By SMITH BARNEY INC.
BY
- -----------------------------------
Managing Director
19
<PAGE> 20
SCHEDULE I
GARGOYLES, INC.
<TABLE>
<CAPTION>
NUMBER OF
SELLING SHAREHOLDERS SHARES
- -------------------------------------------------------------------------------- -----------
<S> <C>
Dennis L. Burns.................................................................
Trillium Investors II, LLC......................................................
-----------
Total.................................................................
===========
</TABLE>
20
<PAGE> 21
SCHEDULE II
GARGOYLES, INC.
<TABLE>
<CAPTION>
UNDERWRITER
- -------------------------------------------------------------------------------
<S> <C>
Smith Barney Inc...............................................................
Robertson, Stephens & Company LLC..............................................
-----------
Total................................................................
===========
</TABLE>
21
<PAGE> 1
Exhibit 5.1
[Perkins Coie Letterhead]
August 13, 1996
Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for
the authorization and issuance by Gargoyles, Inc. (the "Company") of up to
1,666,667 shares (the "Company Shares") of the Company's common stock, having no
par value (the "Common Stock"), and the sale of up to 1,000,000 shares of the
Common Stock (the "Selling Shareholder Shares") offered by certain of the
Company's shareholders (the "Selling Shareholders"), together with an
additional 400,000 shares of Common Stock if and to the extent the underwriters
exercise an over-allotment option granted by the Company and the Selling
Shareholders (the "Over-Allotment Shares"), and the preparation and filing of a
registration statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), which you are filing
with the Securities and Exchange Commission with respect to the Company Shares,
the Selling Shareholder Shares and the Over-Allotment Shares (collectively, the
"Shares").
We have examined the Registration Statement and such documents and
records of the Company and other documents as we have deemed necessary for the
purpose of this opinion. Based upon the foregoing, we are of the opinion that
upon the happening of the following events:
(a) the effectiveness of the Registration Statement and any
amendments thereto,
(b) due execution by the Company and registration by its registrar
of the Shares,
(c) the offering and sale of the Shares as contemplated by the
Registration Statement, and
(d) receipt by the Company of the consideration required for the
Company Shares and the Over-Allotment Shares to be sold by the
Company as contemplated by the Registration Statement,
the Shares will be duly authorized, validly issued, fully paid and
nonassessable.
<PAGE> 2
Gargoyles, Inc.
August 13, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all
post-effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters." In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
PERKINS COIE
<PAGE> 1
EXHIBIT 10.48
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE (the "Agreement") is
entered into as of April 12, 1995, between Gargoyles, Inc. ("G.I.") and [*]
("[*]").
WHEREAS G.I. has filed Civil Action No. C94-1579R against [*] in the
United States District Court for the Western District of Washington (the
"Lawsuit") alleging inter alia, that [*] use of the mark "GARGOYLES" is an
infringement of G.I.'s rights; and
WHEREAS [*] has denied and continues to deny all claims made by G.I. in
the Lawsuit but is nevertheless prepared to compromise the matter; and
WHEREAS G.I. and [*] desire to resolve any and all disputes between
them, including but not limited to those raised in the Lawsuit;
NOW, THEREFORE, in consideration of the promises and conditions set
forth below and other good and valuable consideration, the receipt of which is
hereby acknowledged, G.I. and [*] agree as follows:
1.0 COMPROMISE AND STIPULATION OF DISMISSAL
1.1 G.I. acknowledges and agrees that this Agreement is the result of a
compromise of disputed claims and shall not be construed as an admission by [*]
of any liability to or wrongful acts against G.I. or any other person. [*]
expressly disclaims any liability to or wrongful conduct against G.I. or any
other person, on the part of itself, its affiliated or related companies, or any
of their respective officers, employees or agents.
1.2 G.I. and [*] agree to enter into a Stipulation of Dismissal with
prejudice pursuant to Rule 41 of the Federal Rules of Civil Procedure in the
form annexed hereto as Attachment D, which may be filed by either party hereto
upon execution of this Agreement and payment of the amount referred to in
paragraph 4.l hereof.
2.0 ASSIGNMENT OF RIGHTS TO G.I.
2.l [*] hereby assigns to G.I. all its right, title and interest
in the United States and Canada in and to the mark "[*]," the mark "[*]," any
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composite terms including the term "[*]" or "[*]" but not to the extent such
terms include other [*] marks (hereinafter collectively "the Mark"),
U.S. trademark application Serial No. [*] and U.S. Trademark
Registration No. [*], and all goodwill associated with the Mark, such
application and such registration. [*] agrees to execute the Trademark
Assignments attached hereto as Attachment A and, at G.I.'s request, any other
documents, including an amendment to allege use, reasonably required to perfect,
establish or record the transfer of all its right, title and interest in the
Mark.
2.2 [*] agrees not to directly or indirectly challenge, oppose, or
contest G.I.'s ownership of or rights in the Mark, or G.I.'s efforts to register
or maintain registrations for the Mark anywhere in the world. [*] and G.I. agree
not to directly or indirectly challenge, oppose, or contest the use by the other
of the Mark anywhere in the world.
3.0 TRADEMARK LICENSE TO [*]
3.1 Upon execution of this Agreement, G.I. agrees to execute and
deliver to [*] the Trademark License Agreement in the form attached to this
Agreement as Attachment B. [*] agrees not to challenge or contest the validity
of the license granted under this Agreement.
4.0 PAYMENT TO G.I.
4.1 Promptly upon execution of this Agreement by both parties, [*] will
pay or cause to be paid to G.I. one million dollars ($l,000,000).
4.2 As a material inducement to [*] to enter into this Agreement, G.I.
agrees that it is not entitled to the payment of any royalties or any other
payment of any kind whatsoever with respect to the use, exhibition, performance,
display, exploitation, delivery, transmission, sale or sublicense of [*], works,
or any element thereof in any form or by any method whether now or hereafter
known or devised other than as set forth in paragraph 4.l hereof and in the
Trademark License Agreement referred to in paragraph 3.1 hereof. G.I. agrees
that it does not and shall not have any ownership interest in [*], works, or any
element thereof.
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5.0 [*] PURCHASE OF G.I. PERFORMANCE EYEWEAR
5.1 [*] will arrange for representatives of G.I. to meet with
merchandise buyers responsible for purchases of goods for sale at [*]
retail sales locations within [*]. The parties will engage in
meaningful, substantive and good faith discussions concerning the possible
purchase of Gargoyles sunglasses and related products for resale at such stores
and locations. [*], Vice President-Business Affairs of [*], will personally
recommend to the appropriate merchandise buyer executives that such purchase be
seriously considered.
6.0 G.I. PRODUCT
6.1 If in [*] discretion a [*] [*] by a [*] as a [*] requires the
use of sunglasses in G.I.'s product line, then as such opportunities arise over
the four year period April 1, 1995-April 1, 1999, [*] will accord to G.I. the
opportunity to [*] its products for that use, with no payment by G.I. to [*],
before giving such an opportunity to another party, up to a total of [*].
Products furnished for any specific [*] shall be furnished by G.I. at no
cost to [*]. [*] cannot commit to any given use or any use at all and will
retain all [*] over whether the use of G.I.'s products is
appropriate [*]. Within sixty days of the effective date of the
Agreement, appropriate representatives of [*] and G.I. will meet on this
subject. In addition, [*] will accord G.I. the opportunity to discuss what, if
any, other promotional uses, including [*], may be available at no cost to G.I.
in the instance of a specific [*].
7.0 LICENSE OF [*] FOR USE ON BICYCLE HELMETS
7.1 [*] agrees to execute a [*]License Agreement for bicycle helmets in
the form annexed to this Agreement as Attachment D.
8.0 GENERAL RELEASE
8.1 As a material inducement to [*] to enter into this Agreement, G.I.
hereby irrevocably and unconditionally releases, acquits and forever discharges
[*] and each of its owners, stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, insurers, attorneys,
divisions, subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, insurers and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with any of
them, all such persons other than
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[*] in their capacities as such relative to [*] and not as private individuals
(collectively, "Releasees"), or any of them, from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages, actions, causes of action, suits, rights, demands,
costs, losses, debts and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, suspected or unsuspected,
which G.I. now has or claims to have, or which G.I. at any time hereafter may
have or claim to have against [*] or any of the Releasees based upon any act,
event, fact or omission which occurred on or before the date of this Agreement
("Claims"). G.I. expressly waives and relinquishes all rights and benefits
afforded by California Civil Code Section 1542 and does so understanding and
acknowledging the significance of such specific waiver of Section 1542. Section
1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of the
Releasees, G.I. expressly acknowledges that this Agreement is intended to
include in its effect, without limitation, all Claims that G.I. does not know or
suspect to exist in Releasees' favor at the time of execution hereof, and that
this Agreement contemplates the extinguishment of any such Claims.
8.2 As a material inducement to G.I. to enter into this Agreement, [*]
hereby irrevocably and unconditionally releases, acquits and forever discharges
G.I. and each of its owners, stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, insurers, attorneys,
divisions, subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, insurers and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with any of
them, all such persons other than G.I. in their capacities as such relative to
G.I. and not as private individuals (collectively, "Releasees"), or any of them,
from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, controversies, damages, actions, causes of action, suits,
rights, demands, costs, losses, debts and expenses (including attorneys' fees
and costs actually incurred) of any nature whatsoever, known or
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<PAGE> 6
suspected, which G.I. now has or claims to have, or which [*] at any time
hereafter may have or claim to have against G.I. or any of the Releasees based
upon any act, event, fact or omission which occurred on or before the date of
this Agreement ("Claims").
9.0 INDEMNIFICATION
9.1 G.I. agrees that if any shareholder of G.I. makes any claim or
brings any litigation against G.I. or [*] on account of this settlement or
arising out of any of the terms of the Agreement, G.I. shall indemnify and
defend [*] (including the payment of reasonable attorneys' fees) against any
such claims or in any such litigation.
9.2 G.I. and [*] each represent that, except for the Lawsuit, it has
neither filed or commenced any charge, claim, complaint or grievance of any kind
against the other or Releasees with any agency or tribunal nor filed or
commenced any proceeding at law or otherwise with respect to any Claims. If G.I.
or [*] violates its promise in paragraph 8.1 or 8.2, respectively, and initiates
any charge, claim, complaint or grievance based upon any claim that it has
released in this Agreement, such violating party will pay for all loss, damages,
costs and expenses, including reasonable attorneys' fees, incurred by the other
party or the Releasees, or any of them in defending against such claim.
9.3 G.I. represents that it has not heretofore assigned or transferred,
or purported to assign or transfer, to any person or entity, any of the Claims
or portion thereof or interest therein.
10.0 CONFIDENTIALITY
10.1 G.I. represents and agrees that it will keep the existence, fact,
terms, and amount of this Agreement completely confidential, except (a) as
necessary for the purpose of its enforcement, (b) in response to a court order
or an authorized request from a duly constituted governmental body, or (c) as to
its financial and tax advisors, or prospective investors in G.I. in the course
of their due diligence, provided that any such prospective investor shall first
agree in writing to preserve and maintain the confidentiality pursuant to its
own confidentiality provisions and shall not be used to circumvent the
obligation of confidentiality in this paragraph. Should either party be required
to disclose this Agreement or any term or condition thereof in any court or
administrative proceeding, it will promptly notify the other with reasonable
expedition once the possibility that disclosure may be ordered is known, and in
any event prior to
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<PAGE> 7
such disclosure, and will use reasonable efforts to preserve the confidentiality
of such disclosure under a suitable protective order. In the event of a media
inquiry made directly to G.I. concerning the Lawsuit, the following may be
disclosed: "The parties have resolved their differences and the Lawsuit has been
terminated." In the event of a customer inquiry made directly to G.I. concerning
the use by [*] of the trademark "GARGOYLES," the following may be disclosed: "We
have a license agreement with [*] for use of the GARGOYLES' trademark." Neither
G.I. nor any of its representatives will make any statement or comment of any
kind about any matters related hereto except for the preceding ones. Other than
those two statements, G.I. and all of its representatives will answer all
inquiries or questions with the words, "No comment." G.I. will not initiate,
invite, or encourage any media, press or other attention to the fact of this
Agreement or any dispute between G.I. and [*], nor shall it disclose any
confidential information acquired pursuant to this Agreement to anyone. G.I.
understands and agrees that any disclosure of information contrary to the terms
of this confidentiality provision by it or its representatives or by any person
with whom it is in privity or acting in concert would be damaging to [*], and
G.I. further agrees that [*] would be irreparably harmed by a violation of this
confidentiality provision and therefore shall be entitled to an injunction
prohibiting G.I. or its representatives or any person with whom it is in privity
or acting in concert from any violation or threatened violation of this
confidentiality provision.
11.0 GENERAL PROVISIONS
11.1 Headings. Section headings are used in this Agreement for
convenience and reference only and shall not affect the meaning of any provision
of this Agreement.
11.2 Entire Agreement; Amendments. The parties represent and
acknowledge in executing this Agreement that they do not rely and have not
relied upon any representation or statement not expressly contained herein made
by either party to the other with respect to the subject matter, basis or effect
of this Agreement or otherwise. This Agreement (including its attachments) sets
forth the entire agreement between the parties hereto and fully supersedes any
and all prior agreements or understandings between the parties hereto pertaining
to the subject matter hereof. This Agreement shall not be amended except by a
written agreement subsequent to the date of this Agreement and signed on behalf
of the parties by their respective authorized representatives.
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11.3 Binding Effect. This Agreement shall be binding upon G.I., [*],
and their respective predecessors, successors, affiliates, subsidiaries, related
companies, and in the case of G.I., all companies owned or controlled by the
owner, chairman, or president of G.I. This Agreement shall inure to the benefit
of [*], the Releasees and G.I., and to their predecessors, successors,
affiliates, subsidiaries, related companies, divisions, officers, directors,
employees, assigns, heirs, administrators, representatives, and executors.
11.4 Severability. Should any provision in this Agreement be declared
or determined by any court to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part of
this Agreement.
11.5 Governing Law. This Agreement is made and entered into in the
State of California and shall in all respects be construed, enforced and
governed under the laws of the State of California, excluding choice of law
rules.
11.6 Agreement Jointly Drafted. The parties acknowledge that they both
have participated in the drafting of this Agreement, and the language of all
parts of this Agreement shall in all cases be construed as a whole, according to
its fair meaning, and not strictly for or against any of the parties.
11.7 Signers Authorized. The undersigned persons hereby represent that
they are vested with the authority to execute and enter into this Agreement on
behalf of the respective parties.
11.8 No Partnership. Neither this Agreement, nor any terms and
conditions contained herein, shall be construed as creating a partnership, joint
venture or agency relationship or as granting a franchise.
11.9 No Waiver. Failure of either party to enforce any provision of
this Agreement shall not constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provision hereof, and no waiver shall
be effective unless made in writing and signed by an authorized representative
of the waiving party.
11.10 Signed in Counterparts. This Agreement may be signed in two
counterparts, each of which shall (when the Agreement is or counterparts have
been signed by all parties) be an original, to the same effect as if all
signatures were on the same instrument.
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11.11 Attachments. This Agreement includes the following attachments
which are hereby incorporated by reference:
Attachment A - Trademark Assignments (2)
Attachment B - Trademark License Agreement
Attachment C - [*]License Agreement for Helmets
Attachment D - Stipulation for Dismissal
This Agreement is effective as of April 12, 1995.
GARGOYLES, INC.
Date: April 12, 1995 By /s/ Douglas B. Hauff
------------------ ------------------------
President
------------------------
(Print or type name and title)
[*]
Date: April 11, 1995 By /s/ [*]
------------------------
[*]
------------------------
(Print or type name and title)
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<PAGE> 1
16.1
[Letterhead of McClinton, Workman & Associates, P.S.]
July 26, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Gentlemen:
We have read the statements made by Gargoyles, Inc. (the "Company"), in
the "Experts" Section of the Company's registration statement on Form S-1, which
we understand will be filed with the Commission. We agree with the statement in
such Form S-1 as long as the statement reads as follows concerning our firm and
our firm's prior reports on the Company's financial statements.
Effective July 13, 1995, the Company's Board of Directors retained
Ernst & Young LLP as the independent accountants for the Company. There were no
disagreements with McClinton, Workman & Associates, P.S., the Company's former
independent accountants, regarding accounting principles or practices, financial
statement disclosures, or auditing scope or procedures. The former accountants'
report for the fiscal year ended November 30, 1994, which report is not included
herein, did not contain an adverse opinion or a disclaimer of an opinion or
qualifications as to uncertainty, audit scope or accounting principles. Prior to
retaining Ernst & Young LLP, the Company had not consulted with Ernst & Young
LLP regarding the application of accounting principles, the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any event that was either a reportable event or the subject of a
disagreement.
Very truly yours,
McCLINTON, WORKMAN & ASSOC., P.S.
McClinton, Workman & Assoc., P.S.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 900 23,380
<SECURITIES> 0 0
<RECEIVABLES> 2,524,844 7,849,306
<ALLOWANCES> 10,355 78,833
<INVENTORY> 5,473,692 6,448,505
<CURRENT-ASSETS> 9,219,652 16,328,366
<PP&E> 2,575,550 3,147,626
<DEPRECIATION> 674,947 982,000
<TOTAL-ASSETS> 11,266,234 21,818,367
<CURRENT-LIABILITIES> 11,912,036 21,340,640
<BONDS> 0 0
0 0
0 0
<COMMON> 5,788,070 9,302,250
<OTHER-SE> (12,991,684) (15,462,619)
<TOTAL-LIABILITY-AND-EQUITY> 11,266,234 21,818,367
<SALES> 17,895,968 17,626,816
<TOTAL-REVENUES> 18,375,968 17,920,425
<CGS> 7,016,815 7,386,185
<TOTAL-COSTS> 10,549,513 11,994,338
<OTHER-EXPENSES> 3,206,455 1,160,837
<LOSS-PROVISION> 1,597,051 0
<INTEREST-EXPENSE> 1,042,523 1,161,119
<INCOME-PRETAX> (2,396,815) (2,620,935)
<INCOME-TAX> (100,000) 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,296,815) (2,620,935)
<EPS-PRIMARY> (0.38) (0.43)
<EPS-DILUTED> (0.38) (0.43)
</TABLE>
